country with more than $500 billion in reserves (itself down around $100
billion from just August this year), market signals are not so much about the
government as they are about the overall level of confidence in the economy and
its business representatives.
The first point of the market's loss of confidence is the mounting debt
maturities of various Russian companies and the country's largest banks, all of
which tapped the short-term (one- to two-year) markets to finance their
expansion plans. With many of these facilities now coming due for payment, and
no prospect that any investor would agree to postpone payments for another
couple of years (refinancing), the Russian government has been expected to step
up.
The only other alternative for investors in such nominally private
companies, namely to convert the debt into equity stakes, doesn't apply in the
case of Russia, due to the high-handed behavior of the government. Thus,
despite very little in the way of direct obligations, the shadow of the 1998
debt default by Russia along with a string of Kremlin-inspired malfeasance has
scared investors and caused a flight from Russia. Many oligarchs are rumored to
be urgently stashing away their wealth in destinations far away from Russia,
adding to the pressure on the currency - this is even being cited as one reason
for private companies to deny payments to foreign creditors as their owners
make off with the bank balances.
It is still possible for Russia to take remedial steps that could prevent an
escalation of the current crisis into a full-blown economic collapse. After
underpinning the viability of Russian banks, it must undertake quick steps to
improve investor confidence; for example by avoiding arbitrary closure of its
stock markets whenever prices fall [4], avoiding the temptation to indulge in
currency intervention and implementing steps to improve bankruptcy procedures,
corporate governance and the like which can help create equilibrium much
faster.
South Korea
Perhaps the country that shocked me the most by its presence on this list,
South Korea has failed to learn the basic lessons of asset-liability and
liquidity management from its previous crisis in 1997-98. Most recently, the
Korean government has had to unveil a $100 billion guarantee program for the
offshore debt of its banks, taking away a rather substantial chunk of the $240
billion or so of foreign exchange reserves that it boasts.
Given the escalating current account deficit and poor prospects for investment
inflows, it is possible (albeit very unlikely) for Korea to run out of foreign
exchange by the beginning of 2010. This must be problematic for any country,
and more so for one with international pretentions, as shown by the abortive
global takeovers attempted by South Korean companies such as KDB [5] and
Samsung in recent months.
There are numerous culprits here. Most notable is the Bank of Korea, which
followed an ill-advised policy of maintaining an onshore US dollar shortage in
order to deflect the potential for Korean won appreciation. In so doing, it
created the conditions for greater offshore borrowings to fund the economic
reliance on the export market rather than domestic consumption. In turn, this
left banks and companies with the same mix of short-term liabilities against
longer-term assets that marked South Korea's first descent into a balance of
payments crisis in the Asian financial crisis of 1997.
Ironically, many equity index managers were finally upgrading Korea from its
perch in "emerging markets" to a new "developed markets" level; instead it
appears that Korea will have to negotiate to stay afloat in the emerging
markets category; its most recent equity, currency and credit performance
certainly put it in the same category.
India
To a number of people who bought into the BRIC - Brazil, Russia, India and
China - hoopla, India's fall from grace parallels that of Russia. Here again,
it is not the external borrowing practices of the sovereign itself that are to
blame; funnily enough, neither are the borrowings of local companies in global
markets considered to be excessive. In any event, less than $25 billion of
Indian corporate and bank debt falls due by the end of next year compared with
$275 billion of foreign exchange reserves that the country boasts. Even
accounting for zero capital inflows and continued current account deficits, the
overall cushion will remain close to $200 billion.
Achilles though still has a heel. The loss of confidence can be traced to the
haphazard decision-making of the central bank, which came late to the
inflation-fighting party this year in a futile attempt to prevent foreign
exchange appreciation, thereby causing policy about-turns that stun even the
most adept of investors.
Secondly, political noise in the country has been increasing ahead of next
year's elections. This has turned investors naturally cautious, and in turn
made crisis management a bit trickier for the government (in which respect
there is much in common with the recent US experience).
Thirdly, there is legitimate concern both domestically and offshore about the
impact of low infrastructure investments by India over the past two decades.
The problems seen in the poorest parts of the country offer a closer view,
albeit one that the media have been slower to latch onto compared with the
markets.
Recent violence in the state of Orissa between Hindu fundamentalists and
Christian missionaries showed not so much the tinderbox of religious
intolerance as it did the fairly low "price" that poor Indians assigned to
their centuries-old culture and religion. For the destitute and the desperate
whose battle for basic sustenance is all-consuming, manna from any source is
welcome. Inconveniently enough for the people who believe in an India that can
outshine its recent past, the images aptly conveyed the two sub-nations (the
upwardly mobile and the downwardly stale) created by communist-inspired
governments in the country. [6] As in the case of Russia, the response from
investors has been to sell first and ask questions later.
And in closing ...
Perhaps the one quote from Greenspan's testimony that I find myself agreeing
with, and especially the last sentence: "There are additional regulatory
changes that this breakdown of the central pillar of competitive markets
requires in order to return to stability, particularly in the areas of fraud,
settlement, and securitization. It is important to remember, however, that
whatever regulatory changes are made, they will pale in comparison to the
change already evident in today's markets. Those markets for an indefinite
future will be far more restrained than would any currently contemplated new
regulatory regime."
The fact that a market become overcautious at the drop of a hat (or a few
billion dollars) is borne out by the experience of the US subprime mortgage
market, as it is for countries such as Russia, South Korea and India. In all
these cases, the loss of confidence that has been sparked by a combination of
quantitative and qualitative factors will induce substantial behavioral shifts
that will take years if not decades of patient reworking for these markets
and/or countries to correct. Pretenders, whether they are government officials
or market fallacies, will always be exposed.
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