Soros Has the Last Laugh

Editorial

Picture: Sergey Zheglo

Streams of foreign capital have flooded the country. The main task of the Central Bank has become a war with excess liquidity, and banks hand out money, completely disregarding the financial state of borrowers. State and sub-state corporations are mired in debts. There is a boom on the property market. The national currency is as strong as steel, resting upon foundations of growing reserves. Something sound familiar? No, this is not Russia in 2007; this was a typical situation in the five "Asian Tigers" during the first half of the 90s, the eve of the crisis, when one after another the economies of these countries collapsed like domino pieces.

The Asian crisis turned out to be with precedent in two senses at least. Firstly, it struck countries with brilliant macroeconomic indicators, including rapid export-driven growth, relatively stable prices and excellently balanced budgets. The state of the economies of the countries of South-East Asia did not arouse particular concern in international financial organizations, the monitoring of which is traditionally concentrated on macroeconomic policy. The points of vulnerability did not, of course, go unnoticed. But they lay in the sphere of financial specifics: in the useless risk-management of banks, in the balance sheets of corporations burdened with spiraling debt (so, the debts of the largest Korean chebols – groups of formally independent firms owned by a family and under its sole administrative and financial control – had by the end of 1996 exceeded their capital by three times), in the excessively high proportion of short-term foreign exchange debts. Financial speculators proved to be more shrewd and efficient than the IMF – the attack on the Thai baht in July 1997 serving as a trigger for the crisis.

Secondly, the crisis proved to be two-fold in every case, with the catastrophic, in scope and timing, outflow of currency occurring at the same time as the bank crisis. Today, the inevitability of exactly such a development of events seems obvious. A rapid liberalization of exchange rates and of the credit sphere preceded the crisis, leading to a significant influx of capital, most of all to the bank sector, and to the rapid growth of the “financial heart” of the region’s economies. The rates of money and credit growth before the crisis surpassed the rates of inflation many times. It is not that the central banks of the countries of the region had not then already understood the danger of short-term streams of capital and excessively rapid monetization, and fought against them. However – and in this is one instructive lesson of the Asian crisis – the active measures in the arsenal of the monetary authorities for such a fight proved to be few. So, the policy of reducing the demand for money by increasing the interest rate, which the Bank of Malaysia was conducting, coincided with a general lowering of interest rates in international markets. As a result, an inflow of foreign capital literally flooded the country, making it very attractive for foreign investors, and the bank was forced to move temporarily to direct restrictive measures.

Are we protected today, taking into consideration all these lessons, from a repeat of a similar development of events? Of course, much has changed: in particular, a number of countries have accumulated very solid reserves as a first line of defense against a sudden deterioration of the balance of payments. In the 10 years after the Asian crisis the total foreign currency reserves of developing countries grew almost 5 times – from $842 billion to $3.9 trillion. Russia came in third place in the world by reserves (just over $400 billion, with interest they cover the total, corporate and state, foreign debt of the country). The IMF has learnt certain lessons. Far more attention has to be paid to monitoring the financial sector and corporate debt. An influx of capital in the markets of developing countries is today considered safe; it withstood the test of a fall of fund indices in the spring of last year, and international investors have no similar new ideas capable of moving speculative streams of capital to the next point of application.

But crises are always unexpected. Economists and politicians, like generals, have a habit of preparing for a past war. Keynes remarked that there is a special optimism inherent in investors in periods of recovery. But a recently reissued bestseller by Robert Shiller, the most authoritative specialist on stock market “bubbles”, is called “Irrational Exuberance”. Then again, it is fully possible that a new Soros has already found a gap in all of the prese