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    May 11, 2010

    The Euro in 2010 Feels Like the Ruble in 1998


    MOSCOW — As the financial markets try to absorb news of a rescue package for Greece and other teetering euro-zone economies, some bankers and economists see parallels to Russia’s default in 1998.

    A decade ago Russia was walking in the same shoes as Greece is today, striving to restore confidence in government bonds by seeking a huge loan from the International Monetary Fund and other lenders. Then, as now, the debt crisis was roiling global financial markets. And hopes were pinned on a bailout — one that in Russia’s case did not work.

    “Greece creates a remarkable sense of déjà vu,” Roland Nash, the head of research for Renaissance Capital investment bank in Moscow, wrote in a recent note to investors. The 1998 bailout designed for Russia, in the form of a rescue package offered by the International Monetary Fund, had the effect of forestalling but not preventing Russia’s defaulting on its foreign debt.

    During the month between the announced rescue and that default, Russian and Western banks frantically cashed out of short-term debt as it matured, changed the rubles into dollars and spirited the money out of Russia.

    The bailout propped up the exchange rate through this process, enriching those bondholders who got out early and leaving the embittered Russian public holding the debt and having to pay back creditors, including the I.M.F. By Aug. 17, 1998, when the government announced a de facto default on Russia’s foreign debt and said it would allow the ruble to float more freely against the dollar, the World Bank and monetary fund had disbursed about $5.1 billion of the bailout money.

    Some analysts say that if a similar pattern takes hold in the euro-zone rescue, it could be European taxpayers paying for the bailout while investors in Greek debt are largely made whole.

    In Russia’s case, the monetary fund, spurred to action by the Clinton administration’s worries about the political consequences in Russia of a financial collapse, cobbled together an aid package that was enormous by the standards of the day.

    The monetary fund and other lenders first proposed $5.6 billion, but then raised it to $22.5 billion, including previous commitments — the equivalent of $29.5 billion in today’s dollars.

    In Greece, the fund and European Union initially proposed a bailout of 110 billion euros, or $139 billion, last week. After markets reacted skeptically, European finance ministers met over the weekend and proposed a nearly $1 trillion financial support package for Greece and other weak euro zone economies. They proposed forming an investment fund guaranteed by the governments of richer European Union countries like Germany and France that would also draw on monetary fund money.

    With Russia, the successive bailout proposals were quickly judged by the markets as too little, too late — as happened with the Greek crisis before the latest announcement.

    “You need speed to put out a forest fire,” Anatoly B. Chubais, who was the lead Russian negotiator with the International Monetary Fund in the 1998 crisis, said in written responses to questions about the Greek bailout.

    Edmond S. Phelps, a Nobel laureate and Columbia University economist, in a telephone interview cited a lesson from the 1998 bailout: lenders should announce their highest number as quickly as possible, to keep interest rates down and lower the cost of a bailout. International lenders, he said, need to go in “with all their guns blazing.”

    Mr. Nash, in his investor note, wrote that bond investors analyzing the situation in Greece and the other weak southern European economies may be doing what bond investors did during the Russia crisis — sizing up underlying negative financial forces so potent that many investors bet against even the bigger bailout package.

    Back then, as now, a global economic crisis had rendered local economies uncompetitive at the existing exchange rates. Russia at the time had pegged the ruble to the dollar, Greece today is locked into the euro zone.

    In Russia’s case, the prices for the country’s mainstay petroleum exports had plummeted the previous year because the economic contraction in Asia in 1997 had diminished demand. The ruble was under pressure to follow this trend downward. For many months, though, the Russian central bank kept the ruble pegged to the dollar — a dollar that was gaining strength as global investors sought a safe harbor.

    Only after the Russian central bank finally did devalue the ruble in August 1998, which plunged by 70 percent within a month, did the Russian economy begin to recover. The turnaround was faster than anybody imagined. Within a year, Russia’s economy had recovered to precrisis levels and a decade of rapid growth followed. Banks rushed back to do business in Russia.

    Russia’s oil woes back then may be analogous to the gap today between Greece’s and Southern Europe’s low productivity and the high salaries its workers receive in euros. But the fix may be harder to achieve.

    “Greece, fundamentally, does not have a debt problem,” Mr. Nash wrote. “It has an economy which is not competitive at the prevailing exchange rate and which lacks the structural flexibility to become competitive.”

    Rather than a devaluation — which would be impossible without dismantling the euro zone, or letting Greece withdraw from it — bond analysts will be looking for evidence that salaries and public benefits for millions of people in Southern Europe can be forced down before the bailout money runs out. Civil protests in Athens have made many investors skeptical of that happening.

    Economics aside, during the Russian crisis the failed bailout ended up altering the nation’s politics in ways still being felt.

    In the midst of the crisis, as it became clear the monetary fund’s rescue was failing, fear of domestic unrest rose in Russia. Coal miners blocked the trans-Siberian railway and Muscovites made runs on banks.

    Amid the turmoil, President Boris N. Yeltsin felt compelled to make a snap political decision. He replaced his chief of the Federal Security Service, a successor agency to the K.G.B., with a harder-line figure, the then little-known Vladimir V. Putin.