The Russian Default Scenario As Script For Europe's Next Steps

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Submitted by Nicholas Bucheleres of NJB Deflator

Russian/Euro Credit Crisis Analog

Below is the second half of a timeline on the Russian/Asian Credit Crisis of the late-90s that I amended with what I think are the analogous happenings of the Euro Crisis.  Italicized text is the Euro Crisis equivalent of the Russian analog; full Russian Crisis timeline can be found here.  No event has been rearranged, removed, or edited, so there are some temporal discontinuities between the months leading up to the Russian default and the current Euro Crisis, but the resemblance is remarkable. 

Russia and the southeast Asian countries are analogs for Greece, Spain, and Cyprus, with no particular association between their references within the timeline.  The timeline runs through the Russian pain; things begin to turn around after the timeline ends.

This is meant to serve as a reference point: In retrospect it was clear throughout the late-90s that Russia would default on its debt and spark financial pandemonium, yet there were cheers at many of the fake-out "solution" pivot points.  The Russian issues were structural and therefore immune to halfhearted solutions--the Euro Crisis is no different.  This timeline analog serves as a guide to illustrate to what extent world leaders can delay the inevitable and just how significant "black swan event" probabilities are in times of structural crisis. 

It seems that the next step in the unfolding Euro Crisis is for sovereigns to begin to default on their loan payments.  To that effect, Greece must pay its next round of bond redemptions on August 20, and over the weekend the IMF stated that they are suspending Greece's future aid tranches due to lack of reform.  August 20 might be the most important day of the entire summer and very well could turn into the credit event that breaks the camel's back.

*UPDATE: Over the weekend Germany's Roesler said he was "very skeptical" that Greece can be rescued.

Analog runs through August 13, 1998--the point to where I believe the Euro Crisis has evolved.  What happens after that in Russia may stand as a strong indicator of where things will head in the coming weeks/months in Europe.

May 21, 1998
[Indonesian President] Suharto resigns after 32 years in power. Vice President Habibie succeeds as president.

Greek leadership shake-up over lack of confidence in government, wherein prime minister Papandreou steps down (Spring 2012).

May 22, 1998
The IMF indefinitely postpones aid disbursement to Indonesia of $1 billion scheduled for June 4. US Treasury Secretary Robert Rubin says the aid should be delayed until the political situation stabilizes.

 The US, UK, and Canada refuse to add to the IMF's bailout package for Europe (Spring 2012).

May 27, 1998
  Russia's financial system is stretched to the breaking point as panic-striken stock and bond markets continue to plunge, forcing the central bank to triple interest rates to 150% to avert a collapse of the ruble.

 The Athens Stock Exchange drops 27% from May 1 through June 1.

May 27-28, 1998
A two-day, nation-wide strike is held in South Korea by union workers to protest the growing wave of unemployment in the country. Since February, South Korean companies have been laying off 10,000 workers per day.

 One of the many strikes within the EMU as companies shed jobs as a result of high-unemployment driven drop in demand.  International shipping companies halt business with Greek ports due to uncertainty over the nation's finances (Spring 2012).

June 1, 1998
Russia's stock market crashes and Moscow's cash reserves dwindle to $14 billion amid unsuccessful attempts to prop up the ruble and pay off burgeoning debts. President Clinton pledges support for Yeltsin.

 Greek bond yields rise throughout 2012 reaching a peak coupon of 30% on the 10yr.  President Obama urges European leaders to handle the situation swiftly (Spring 2012).

June 12, 1998
Japan announces that its economy is in a recession for the first time in 23 years.

 The UK enters double-dip recession (April 2012).

June 17, 1998
The yen's fall to levels near 144 to the dollar rattles Wall Street, prompting the US Treasury and Federal Reserve to intervene to prop up the yen. Japan and the US spend some $6 billion to buy yen in order to strengthen it. Clinton calls on Tokyo to quickly resolve its banking problems and stimulate the economy.

 The Bank of International Settlements (BIS) supports the euro, especially the EURUSD cross, throughout the summer of 2012 through intervention in the foreign exchange market.

June 24, 1998
Russian Prime Minister Sergei Kirienko submits a budget austerity plan to the IMF, which releases a previously held loan installment of $670 million.

 Becoming clear that Germany will be on the hook for financing further bailouts, Merkel filibusters all aid plans that don't include strict austerity measures (Spring 2012).

June 25, 1998
Indonesia and the IMF announce a fourth agreement to rescue an economy quickly sinking into chaos. The IMF agrees to restore subsidies for food and fuel and provide another $4 billion to $6 billion for basic necessities.

 The ECB OKs LTRO2 worth 529.5billions euros to save "an economy quickly sinking into chaos" (February 2012).

July 1, 1998
Russia's lower house of parliament, the Duma, postpones action on spending and tax reforms needed to close the budget deficit and qualify for IMF loans.

 Spanish citizens continue to emigrate from Spain in droves to countries like Argentina to avoid looming austerity measures (Spring 2012).

July 6, 1998
Moscow's markets get pummeled as the government fails to raise cash by selling government shares of a state-owned oil company. Moscow hints that an IMF loan agreement is near.

 Spain's IBEX 35 falls 30% from March 19 through June 1 as the austerity versus growth debate intensifies within Europe.  Political entropy paralyzes Europe.

July 10, 1998
President Clinton calls on the IMF to quickly conclude negotiations over emergency loans for Russia after getting a call for help from Boris Yeltsin, sparking a rally in Moscow's markets.

 Treasury Secretary Geithner reminds Europe's public financiers that currency swap lines are open, which offers little respite to markets (Spring 2012).

 July 13, 1998
The IMF announces a package of $23 billion of emergency loans for Russia. The international lender dips into an emergency line of credit to provide its share of financing. Russian stocks and bonds soar.

 The ECB shores up a 100billion euro bank bailout for Spain, though Spain publicly denied it would need such a bailout until hours before its announcement.  Markets rallied on the rumor of the bailout and promptly sold-off once the bailout was officially announced
(June 2012).

July 16, 1998
Russia's Duma approves some of Yeltsin's $16 billion proposed tax reforms needed to meet conditions for IMF loans. But it rejects higher sales and land taxes.

 Spain lays out a plan to lower its public deficit by 65billion euros by 2015 that includes harsh austerity measures (July 2012).

July 19, 1998
Yeltsin vetoes tax cuts approved by parliament and issues decrees imposing a 3% tax on imports and quadrupling land taxes to close the budget deficit and secure IMF loans. He also pledges renewed efforts to collect taxes.

 In an attempt to raise up more public money, the Spanish government plans the sale of 100 government-owned commercial real-estate properties (July 2012).

July 20, 1998
The IMF gives final approval to a $22.6 billion loan package to Russia. However, because the Duma fails to enact some of the austerity measures mandated in the loan agreement, the first two planned installments are reduced from $5.6 billion to $4.8 billion.

 Finland, an opponent of a no-strings-attached Spanish bailout, votes to officially support the rescue package, and the bailout is OKed by the Eurogroup.  At the same time, more trouble is detected within Spain's regional governments, who were supposedly well capitalized (July 2012).

July 28, 1998
The IMF announces that it will ease conditions on its $57 billion aid package to South Korea which had been blamed for rising unemployment and overburdened welfare programs.

 While negotiating stimulus versus austerity, Merkel eases a bit on her reform timeline, which offers little relief to GIPSI government debt yields, which continue to scream higher (Summer 2012).

August 3, 1998
Wall Street reacts to the deepening crisis; the Dow plunges 300 points in its third-biggest loss.

 Cyprus requests a bailout worth 10% of its GDP; Cyprus is the fifth European nation to formally request a bailout.  Trader commitments reach all-time bearish levels (June 2012).

August 4, 1998
Amid speculation that China will be forced to devalue its currency, Hong Kong's dollar and stock market come under attack.

 Global markets begin to sell-off again amid consistent global GDP growth downward revisions and sovereign European credit downgrades after a short-covering rally in June (July 2012).

August 6, 1998
The World Bank approves a $1.5 billion loan for Russia as Moscow puts pressure on striking miners and tax deadbeats in an effort to put its finances in order. Asian markets plummet as Hong Kong and China step in to defend their currencies against attack.

Even after the 100billion euro Spanish bailout is approved, Spain's 10yr government bond yields still flirt with the 7% threshold that would banish them from the debt market by making borrowing costs unsustainable (July 2012).

August 11, 1998
The Russian market collapses. Trading on the stock market is temporarily suspended. World markets are rocked by fears of a financial meltdown in Asia and Russia.

 Greece admits to not adhering to reforms attached to their bailout; the IMF plans to stops loan tranches to Greece.  Global markets close July 20, 2012 in the red across the board, erasing the week's gains.

August 13, 1998
Russia's markets collapse on fears that Moscow will run out of money and default.

 Catalonia, in addition to Valencia, will need a regional Spanish bailout (July 2012)

August 14, 1998
Yeltsin calls for an emergency session of parliament and declares that "there will be no devaluation" of the ruble. In Hong Kong, authorities spark a stock rally by moving to foil speculators with surprise purchases of stocks and dollars.

August 17, 1998
Russia announces a devaluation of the ruble and 90-day moratorium on foreign debt repayment, triggering panic in Moscow as Russians line up to buy dollars. Western leaders denounce the Russian default. Latin American stock and bond markets plunge on fears of default and devaluation in South America.

August 19, 1998
Russia fails to pay its debt on GKO or treasury bills, officially falling into default. The IMF and Group of Seven (G-7) say they won't provide additional loans to Russia until it meets existing promises.

August 21, 1998
Russia's economic crisis shakes world markets, bulldozing stocks and bonds in Latin American and reverberating through the US and Europe. Russia's Duma calls for Yeltsin's resignation. Investors pile into US Treasury bonds as a safe haven from the storm, causing yields to drop to record lows.

August 24, 1998
Yeltsin dismisses Kirienko and names Viktor Chernomyrdin as primeminister.

August 31, 1998
After weeks of decline, Wall Street is overwhelmed by the turmoil in Russia and world markets. The Dow Industrial average plunges 512 points, the second-worst point loss in the Dow's history.

Sept. 4, 1998
Federal Reserve Chairman Alan Greenspan says that the US is ready to cut interest rates to keep the crisis from snuffing out US growth. "It is just not credible that the United States can remain an oasis of prosperity," he says. Latin stocks and bonds plummet.

Sept. 7 or 8, 1998
Russia's Duma rejects Prime Minister-designate Chernomyrdin and the central bank chairman resigns, deepening the country's political and economic turmoil. Russian investors and lenders estimate their losses at $100 billion. The Dow surges 381 points after Greenspan suggests that policy makers are considering an interest cut.

Sept. 10, 1998
The Dow loses 249 points as Brazilian stocks fall 16%, adding to drops that have erased half the Brazil market's value. In Mexico, the Central Bank sells some $50 million in its first attempt to buoy the peso in three years. Yeltsin nominates Yevgeny Primakov as prime minister.

Sept. 11, 1998
The IMF announces that the debacle in Latin American markets is "an overreaction to Russian events" and that it is ready to lend Latin American countries, using an emergency line of credit. Investors flee Brazil, drawing out more than $2 billion a day despite an interest rate rise to 50% by the Central Bank.

Sept. 17, 1998
Tokyo's Nikkei index hits a 12-year low amid steep declines in Hong Kong, France, Britain and the US. The Dow drops 216 points. Congress blocks Clinton's request for $18 billion in funding for the IMF.

Sept. 23, 1998
Pushed by the New York Federal Reserve, a consortium of leading US financial institutions provides a $3.5 billion bailout to Long Term Capital Management, one of the largest US hedge funds, amidst fears that a collapse could worsen the panic in the financial markets.

Sept. 24, 1998
Stocks on Wall Street and in Europe swoon amid fears that the losses suffered by the world's largest banks in the Long Term Capital debacle could put the entire banking system at risk.

Sept. 29, 1998
The Fed cuts interest rates by a quarter point.

Sept. 30, 1998
Worries that the Fed isn't doing enough to rescue the US and global economies cause a 238-point drop in the Dow, for a loss of more than 500 points in a week. Investors around the world flock to US Treasury bonds for safety, causing the yield on 30-year bonds to drop below 5% for the first time in three decades.

Oct. 3, 1998
Japan announces a $30 billion aid package for Southeast Asia to help the region recover from recession.
G-7 ministers create a rescue plan for Brazil.

Oct. 5-8, 1998
In Washington, the IMF and World Bank hold a joint plenary session to debate the global economic crisis.

Oct. 15, 1998
The Fed cuts interest rates for a second time to prevent weak financial markets from tripping the US into a recession. The Dow shoots up 331 points and world markets rally.

Oct. 22, 1998
Amid warnings of winter food shortages in Russia, Moscow creates an emergency food reserve and approves an emergency spending plan that will require the central bank to print at least $1.2 billion to help pay back wages, rescue banks and bring food to desperate regions.

Oct. 27, 1998
Brazil's President Fernando Cardoso announces an austerity plan of $80 billion in tax increases and spending cuts over three years in order to secure an IMF assistance package.

Oct. 31, 1998
The IMF refuses to disburse to Russia a $4.3 billion installment of the $22.6 aid package it agreed to in July, and says it will not resume negotiations about disbursement until Russia produces a realistic budget for 1999.

Nov. 5, 1998
Russia strikes an agreement with foreign investors to accept repayment in rubles of $40 billion of debt frozen in August, but says it will not be able to repay $17.5 billion of debts due in 1999 and will reschedule them. Russia also wins an $800 million loan from Japan, originally part of the IMF rescue deal.