Events related to the Crash

• U.S. President Clinton has directed his administration to free up the resources to allow forgiving 100% of the debt owed to the U.S. by the most impoverished countries (which are not the same as the ones I am tracking on this page). In exchange for this, Clinton is demanding that the former debt payments instead be spent on basic infrastructure and human needs.

• The Netherlands has suspended $15 million of economic aid per year to Zimbabwe, citing the Zimbabwean government as a prime cause. Incidents of particular concern include:
• Threats to seize white-owned farms to resettle landless blacks.
• Deploying 11,000 troops to support Laurent Kabila [President of the Republic of the Congo, formerly Zaire before he conquered it].
• The military's torture of two journalists for publishing a coup plot story.

• Ecuador went ahead and paid $51.9 billion in interest on uncollateralized Brady PDI bonds. Ecuador defaulted on the U.S. Zero-Treasury bond collateralized Brady bonds.
• This has been described as an unacceptable precedent: it damages the value of collateralized bonds from Mexico, Brazil, and Venezuela in particular.
• There is a faction of U.S. bondholders that wants to "accelerate" the payment of both principal and interest. This would reduce the chances of an orderly restructuring.

• It seems that valuing Ecuador's bonds is an art. With Ecuador about to attempt to restructure Brady bonds (which were never meant to be restructured), the following comments have surfaced:
• Ecuador's current spread over U.S. Treasuries is ~42%. This exceeds even Russia's spread of ~37%.
• Chase Securities is assuming a post-restructuring Ecuador spread of ~20%, suggesting roughly a 50% writeoff.
• Michael Gavin, at Warburg Dillon Read, proposes that Ecuador needs to also restructure its Eurobonds and domestic debt. The alternative is either almost 0% on the Brady bonds (cf. Russian GKOs, back in May), or more cash flow problems in 2002, when the next set of Ecuador Eurobonds amortizes. [Another set of Ecuador Eurobonds amortizes in 2004.]

• Ecuador's Finance Minister Alfredo Arizaga has announced that Ecuador is consulting with its lawyers to take measure to prevent the freezing of foreign national accounts in the event of it defaulting on a $94 million interest payment on Brady bonds, due Sept. 28, 1999. Ecuador has also announced plans to buy back $2.6 billion in Brady bonds using future oil revenues. The total public debt is about $13.3 billion, of which Brady bonds are almost half i.e. "almost" $6.65 billion. [Say, anywhere above $5 billion?]

• Thailand, in an official communication to the IMF approved on Sept. 14, 1999, has stated that it does not expect to need the last $3.52 billion out of a $17 billion IMF bailout fund. However, it is retaining the option to draw on that if necessary. [Thailand had already used $13.48 billion of the $17 billion in eight out of a possible twelve uses.]

• The Bank of Japan has successfully resisted pressure from the Japanese Ministry of Finance to loosen monetary policy. Its continuation of its zero-interest-rate policy, without additional measures, is expected to go down "like a lead balloon" with the Ministry of Finance.
• The ¥/U.S.$ rate shifted by about ¥2 to ¥104.60/U.S.$ immediately. Keep in mind that Japanese auto exports are damaged at levels stronger than ¥110/U.S.$.
• Swiss banks have frozen $16.8 million in Russian accounts suspected of being linked to the ROCML Scheme@BNY. Both freezing these accounts, and reporting the fact they have been frozen, are required by a new Swiss law passed in 1998.

• Indonesia is refusing to give an independent audit of PT Bank Bali to the IMF, citing bank secrecy laws. Unfortunately, the IMF has already put loans to Indonesia on hold until it gets a transparent review of the scandal surrounding this bank.
• If it really is the case that giving this review to the IMF violates Indonesian law...either that law must be rewritten, or we can watch Indonesia collapse further. The pervasive violence in Indonesia is a direct result of the Crash.
• On the other hand, the summary Reuters has is lurid enough: it "uncovered numerous indicators of fraud, noncompliance, irregularity, misappropriation, undue preferential treatment, concealment, bribery, and corruption". Also, cabinet ministers and top financial officials are among those potentially involved. The key inside information that enabled the scam was known only to a "small circle of government officials".

• Zimbabwe's Finance Minister Herbert Murerwa announced, in a statement, that "It has become apparent that due to expenditure overruns, the target budget deficit of 5.3 percent of gross domestic product for 1999 is unlikely to be acheived unless remedial measures are put in place." Considering that IMF loans currently require this deficit target of 5.3% of GDP (or less)...something will happen.

• U.S.-based investment fund Newbridge Capital has agreed to acquire control of state-owned First Korea bank for $415 million i.e. 500 billion won. This buys Newbridge Capital a 51% stake in First Korea bank. Newbridge Capital has an option to increase this stake by 5% after 3 years. South Korea has agreed to buy bank all loans that default in the next two years, and to compensate Newbridge Capital for defaults after that.
• In the memorandum of understanding signed in December 1998, First Korea bank was valued at $600 million. Also, South Korea has pumped 5.3 trillion won into the bank to keep it afloat since the memorandum of understanding was signed.

• Ecuador's Central Bank President Pablo Better has announced that Ecuador's tight fiscal situation will make it difficult to pay the $94 in Brady bond interest that was deferred from August 28, 1999 to the end of September. It appears that a final decision is politically required when the (unilaterally?) deferred payment comes due.
• Ecuador's public debt is almost equal in size to its GDP.
• This needs to be considered in light of the situation as known in September 9, 1999.
• South Korea's fund trust investment managers are predicting a liquidity crunch in November, when the cap on selling off Daewoo bonds goes up from 50% (now) to 80%. The investment trusts have been preparing by selling off 3-year Korean Treasuries for the past two days, driving up the yield by 10 basis points yesterday and 9 basis points today.
• While both Finance Minister Kang Bong-kyun and the Financial Supervisory Commission head Lee Hun-jai have both denied that this liquidity crisis is possible, neither provided any explanation why the investment trusts are wrong.

• Britain's third-largest bank Barclays has been closing "a meaningful number" of Russian accounts because of problems determining the legality, the ownership, or both of the money in the accounts. In such clients, Barclays has given 30 days for clients to take their money elsewhere. Barclays insists this has nothing to do with the ROCML Scheme@BNY.
• In June 1999, Barclays closed its Moscow representative office.
• Britain's second-largest bank, Lloyds TSB, has "no effective exposure [to Russia]".

• Zimbabwe's inflation rate for Jan.-August 1999 was 68.8%, versus Jan.-July 1999 which was 63.5%. Month-on-month inflation for August 1999 was described as 2.3%(??) versus 4.8% for July 1999. The IMF inflation target of 30% has been considered unrealistic by a number of economists in the area. The estimated total macroeconomic growth for the year is at most 1.5%, in contrast with 1.6% for 1998 with 32% inflation.
• Direct computations are as follows:
• Month-on-month August 1999 from Jan.-August 1999 vs. Jan.-July 1999: 3.2%
• [Jan.-August 1999]/[Jan.-July 1999]=1.688/1.635~1.032
• Jan.-August 1999 from Jan.-July 1999 and month-on-month August 1999: 67.2%
• [Jan.-July 1999]*[month-on-month August 1999]=1.023*1.635~1.672
• Jan.-July 1999 from Jan.-August 1999 and month-on-month August 1999: 65.0%
• [Jan.-August 1999]/[month-on-month August 1999]=1.688/1.023~1.650
• The most plausible explanation, a priori, is that Reuters relayed a typo in an official Zimbabwe press release. Under this scenario, August 1999 month-on-month inflation is actually 3.2%.

• Ecuador has seized control of Banco Popular del Ecuador, guaranteed the deposits in this bank, and named its assistant Central Bank chief Miguel Davila as Banco Popular del Ecuador's new CEO. The former CEO, Nicolas Landes, resigned shortly after the U.S. froze Banco Popular del Ecuador's U.S. assets on September 9, 1999.

• It is currently unclear whether Ecuador will, or will not, default on its Brady bonds on September 28, 1999.
• If Ecuador makes the Brady bond payment, Ecuador will *not* be able to pay public sector workers. This may not be politically viable.
• On the other hand, political unviability is a relative thing: the new Republicans ['Republibrats'] in the U.S. Congress did a similar stunt Dec. 1995-Jan. 1996. They were able to defer paying Federal workers for three weeks, but came within 24 hours of being lynched by failing to fund two programs: Aid for Families with Dependent Children, and veterans' pensions. These programs are welfare programs for the two social sectors in the U.S. that both can lynch Congress, and if these programs default, would have nothing to lose by lynching Congress.
• If Ecuador defaults, Ecuador's bondholders could vote to demand payment. This initiates legal proceedings in courts Ecuador does not control: highly dangerous.
• Ecuador's 1999 GDP is expected to contract 7% compared to its 1998 GDP. The inflation rate for Jan.-August 1999 has been 35%, compared to 24.7% for Jan.-August 1998.
• Columbia is investigating charges that Ecuador's Banco Popular del Ecuador, and its affiliate Banco Andino Columbia, embezzled $64 million of Columbian tax and customs revenues. Columbia took over Ecuador's Banco Andino Columbia in May 1999, and subsequently brought civil and criminal charges against it. Today, Ecuador's Banco Popular del Ecuador's U.S. assets were frozen at the request of Columbian attorneys in Miami, Florida. Both of these Ecuadorean banks are owned by the Bahamian holding company Ceval.

• Japan's 2Q 1999 GDP has been announced as growing at 0.2% from 1Q 1999. The a priori forecast had been a shrinkage of 0.35%. All of the considerations regarding 1Q 1999 GDP growth figures [mentioned in June/July 1999] still apply, although this level of surprise can be accounted for by public spending. Japan's 2Q 1999 GDP is a critical number, since it will be used in the decision of how large a supplementary budget will be attempted. However, consumer spending is not matching GDP growth; the spectre of ballooning inventories is realistic a priori.

• The World Bank has negotiated a plan (that will be more seriously considered ~September 16, 1999) to arrange a U.S. $140 million loan. The intent is to pay off domestic debt that runs at a much higher interest rate.
• Some sort of reorganization is required: otherwise, Zimbabwe will pay out so much money in interest and pensions that it will not be able to finance critical public works.
• Zimbabwe's macroeconomic growth rate for 1999 is projected to be no higher than 1.5%, in spite of IMF assistance and a macroeconomic growth rate for 1998 of 1.6%.
• The risk of not being able to finance critical public works puts Zimbabwe in the same general risk class as Russia, Indonesia, and Ecuador. My prior estimate of Zimbabwe's condition was too optimistic. I am downgrading Zimbabwe to red.
• If, as implied by the use of U.S.$ in describing the loan size, the loan is denominated in U.S.$, this will cause an automatic demand for foreign currency and an automatic supply of local currency. [See my article on currency markets for details.] Most of Zimbabwe's government debt is already international, so this loan will only aggravate the intrinsic tendency of foreign-currency denominated debt to weaken the local currency. However, the interest rate will be much lower.
• It was evident in July 1999 that Zimbabwe's currency has seriously weakened since January 1999.
• Zimbabwe's domestic debt stood at Z$59.76 billion (U.S.$1.58 billion) at the end of July while foreign debt was Z$90 billion. The foreign debt alone is equivalent to 18% of Zimbabwe's GDP.

• 10 of the 12 units of South Korea's Daewoo are to be managed by domestic bank creditors.
• The units Daewoo still manages are:
• Daewoo Corp. [trading and construction firm]
• Daewoo Motor Co.
• The units that are being managed by domestic bank creditors are:
• Daewoo Heavy Industries Co.
• Ssangyong Motor Co.
• Keang Nam Enterprises Co.
• Daewoo Telecom Co.
• Daewoo Electronic Components Co.
• Orion Electric Co.
• Daewoo Motor Sales Co.
• Daewoo Electronics Co.
• Daewoo Capital Corp.
• Diners Club International Korea.

• The Russian Statistics Agency reported that the Russian GDP declined by 1% in the first half of 1999, down to 1.83 trillion rubles. This does not include the "black economy", which is thought to be at most half as large as the legal economy.
• Russia's economy has not had two consecutive quarters of growth since 1989.
• U.S. authorities investigating the ROCML Scheme@BNY now think that Russian organized crime is trying to infiltrate the U.S. financial system. This is by planting moles in key positions at various Western banks and securities firms. Note, however, that the U.S. FBI has explicitly declared this to be a speculation.
• The Bank of New York may, or may not, have been informed of the marriage of Lucy Edwards and Peter Berlin. Lucy Edwards, before she was fired, was the vice president of East European operations for the Bank of New York.
• The ROCML Scheme@BNY has been demonstrated to involve business and/or individual accounts at Citibank, CoreStates Bank, and Chase Manhattan Bank.
• The Bank of New York has fired a second employee: Svetlanda Kudryautsev, former international banking associate, was terminated for not cooperating with the investigation into the ROCML Scheme@BNY
• South Korea's Financial Supervisory Commission [FSC] has declared SeoulBank nonviable. The FSC has ordered a capital reduction, and has asked the state-run Korea Deposit Insurance Corp. for a fund injection. At the end of last year, SeoulBank's capital adequacy ratio was 0.88%; the fund injection is intended to raise this to 10%.
• South Korea's attempt to sell a 70% stake in SeoulBank to HBSC Plc. had collapsed earlier this week [that is, on or after August 30, 1999]. HBSC insisted on using international standards for valuing SeoulBank's assets. South Korea found this intolerable.

• The Royal Bank of Scotland has been dragged into the ROCML Scheme@BNY. Apparently, U.S. $10 million passed through suspect accounts controlled by Konstantin Kagalovsky (and were investigated) in 1995; however, these accounts are now closed.
• South Korea's Daewoo group, due to inability to get support from domestic creditors, has announced that some of its affiliates will default on interest to international creditors. However, its international debt of U.S. $5.1 billion is only ~10.6% of its total debt of U.S. $48.2 billion. [I know this is too precise by one digit, but I feel that rounding in either direction is inaccurate.]