Washington, 21 September 1998 (RFE/RL) -- The International Monetary Fund (IMF) says that the extreme turbulence experienced by several Asian nations currencies at the start of the financial crisis there last year was "virtually without precedent" in history.
Not only that, it says, but the spillovers into other areas of the world, were particularly "virulent" and exceeded what should have been expected from the level of macroeconomic and trade links between the various countries.
With those thoughts about the start of what has become a global financial crisis, the IMF in it's annual report on International Capital Markets, attempts to find some lessons in understanding how such crises start and, more importantly, spread to other countries.
The report, released today in Washington, covers 1997, before the contagion from Asia helped put Russia into a downward financial spin.
But the report notes that this is only a beginning at understanding the forces that are shaping -- and being shaped by -- the global economy.
The key element is the movement of capital -- private money lent or invested -- and how it can and does move in and out of countries with a speed still little understood.
"The Asian financial crisis has raised the question of the factors underlying the large surges in capital flows to emerging markets and the reasons for the typically abrupt and sharp reversals," said the IMF report.
In other words, what causes sudden shifts in money flows. The report says one factor is obviously the fast supply of information which arrives via television, cellular phone and all means of electronic transmission randomly, and is "immediately" prompts investors to act or often over-react one way or another.
But since it has long been known that investors and lenders as individuals tend to act quickly on new information, the problem arises because of what the IMF report says have been significant improvements in the terms and conditions of access to financial markets in nations around the world. It is far easier to move money now than at any times in history.
There is nothing wrong with open access to capital markets, says the report, so long as certain conditions and controls help prevent sudden shifts of money that quickly collapse entire systems.
For example, the years of economic growth in Asia lulled major banks and investors to charge very little for the risk that was really there -- making loans, for example, at interest rates only slightly above those charged for the strongest international companies. That encouraged very risky firms -- and nations -- to borrow far beyond what they could really afford.
The private international credit rating agencies increasingly provided very strong assessments and ratings of nations, ratings which encouraged lending and investing, but which were not assessing the real dangers lurking in many of these countries.
Mostly, however, says the IMF report, weak regulatory regimes and a lack of transparency in the operation of financial systems in each of the nations now in crisis served to set the groundwork for the trouble. Overall, the report notes, most observers did not anticipate any of the crises until each one occurred, and that tended to cause even sharper cutbacks in short-term financing and a severe curtailment in access to markets.
While it offers no immediate solutions, the report does point out in one small way how the problems in Korea were transmitted to Russia even though the two countries have minimal trade and economic ties.
Korean banks, flush with a huge inflow of private capital, had used much of it to buy substantial amounts of high-yielding Brazilian and Russian government debt instruments on world markets in an attempt to maintain a higher level of profitability than they could earn in Korea itself.
But when the Korean banks suddenly faced severe liquidity problems and needed immediate cash, they were forced to sell the Russia notes and bonds at very low prices.
Selling itself wouldn't have hurt the Russian bonds, but because there were not enough buyers interested in the notes the Korean banks had to sell, the sudden oversupply sent shudders through the whole market for Russian debt. It was the collapse of that market that helped push Russia over the brink.
The IMF report says that countries with weak and underregulated banking systems are less able to manage the negative consequences of volatile capital flows and the accompanying pressures on exchange rates. It says that in Russia the whole issue of lax licensing and regulation of banks had been causing problems since the break-up of the Soviet Union. Without major reforms, which the IMF was pushing on Russia, however, the report says it was only a matter of time until the collapse came.