The Chastening
Page 46
Page 188: A thorough account of the arm-twisting that went on during the debt crisis of the 1980s can be found in Steven Solomon, The Confidence Game: How Unelected Central Bankers Are Governing the Changed World Economy (Simon & Schuster, New York, 1995).
Page 194: Information about McDonough’s background and career comes from John M. Berry, “Fighting Inflation for Just Plain Folks: New York Fed Chief William McDonough Puts Bank’s Mission in Populist Terms,” The Washington Post, December 29, 1993; and Sylvia Nasar, “Deputy Chosen as Head of New York Fed,” The New York Times, July 17, 1993.
Pages 197-198: Some of the details about Lipton’s meeting with Kim Dae Jung, including the banner on the building and Kim’s reply that his “first priority is the competitiveness of the Korean economy,” come from a memo based on reporting by my Washington Post colleague Clay Chandler, who was in Seoul at the time.
Page 199: The statement on the new rescue plan, “Korea Strengthens Economic Program: IMF to Activate Additional Financial Support,” December 24, 1997, is available on the IMF website.
Page 202: An extensive account of the negotiations between the banks and the Korean government can be found in Peter Lee, “Korea Stares into the Abyss,” Euromoney, March 1998.
Pages 202-203: Hong Kwan Pyo’s story comes from Mary Jordan, “Middle Class Plunging Back into Poverty,” The Washington Post, September 6, 1998.
Page 203: The passage from Rubin’s speech comes from Floyd Norris, “Giving Credit Where Blame Might Be Due,” The New York Times, January 25, 1998.
Page 204: A particularly cogent argument against the IMF’s overuse of structural conditions in its Korea program is presented in Martin Feldstein, “Refocusing the IMF,” Foreign Affairs, March/April 1998.
CHAPTER 8: DOWN THE TUBES
Pages 207-208: Information about the chaotic situation in Indonesia in early January comes from S. N. Vasuki, “Jakarta Residents Start Hoarding Basic Commodities,” Business Times (Singapore), January 9, 1998; and Susan Sim, “Indonesians Go on Panic Buying of Food Items,” Straits Times (Singapore), January 9, 1998.
Pages 208-209: Details of the conversation between Presidents Clinton and Suharto were provided by a source with access to the transcript.
Page 210: The comment “It’s not that he tried the program and the program has failed” comes from my notes of an interview I held at the time.
Page 211: Details of the second Indonesia program are available on the IMF website; also in Kenward, “In the Trenches.”
Page 214: Camdessus’s remarks at his January 15, 1998, press conference, which I attended, are available on the IMF website.
Aghevli’s comments about the celebratory lunch on January 15 come from Paul Blustein, “At the IMF, a Struggle Shrouded in Secrecy,” The Washington Post, March 30, 1998.
Pages 214-215: My impressions of the situation in Indonesia in late January are reported in detail in Paul Blustein, “Indonesia Braces for Worst As Its Currency Collapses,” The Washington Post, January 24, 1998.
Page 215: Aghevli’s comments about his surprise over the program’s failure come from Paul Blustein, “Indonesian Currency Still Falling: Officials Surprised Reform Plan Hasn’t Steadied Rupiah,” The Washington Post, January 17, 1998.
Page 216: Other financial analysts who took a line similar to Singh’s included the following:
Daragh Maher of ING Barings told clients in his “Indonesia Morning Agenda” of January 16, 1998: “Certainly many of Indonesia’s technocrats and possibly the International Monetary Fund will be wringing their hands with glee following President Suharto’s commitment to a wide range of structural reforms. However, although this package will remove concerns that the government is unwilling to commit to structural reforms, it will do little to ease many of the pressures facing Indonesia’s economy, notably with regard to servicing external debt obligations.”
Irene Cheung of Merrill Lynch wrote in a bulletin to clients on January 15 after listing the reform measures to which Suharto had agreed: “These measures, if implemented, should largely meet the demand of the investment community ... however, our immediate concern is that the measures offer little relief to the problems faced by corporates and the population at large, at this point in time.”
SBC Warburg Dillon Read, in its assessment of the IMF package, told clients: “In our view, the proposed reforms are broadly positive in all respects and should enhance Indonesia’s medium- to long-term economic prospects. ... However, what was noticeably absent in the Letter of Intent was how the private sector external-debt problem will be dealt with.”
Page 219: The comprehensive deposit guarantee was combined with the establishment of the Indonesian Bank Restructuring Agency (IBRA), which was designed to take over and rehabilitate weak banks and manage the nonperforming assets of other troubled banks.
Page 220: The IMF staff report lamenting the delay in addressing the corporate debt problem is Lane et al., “IMF-Supported Programs in Indonesia, Korea and Thailand: A Preliminary Assessment.”
Kohler’s statement that “I will not have another Indonesia” comes from Joseph Kahn, “International Lenders’ New Image: A Human Face,” The New York Times, September 26, 2000.
Page 222: Suharto’s statement that “we must quickly fix the currency at a certain rate” comes from Darren McDermott, Jay Solomon, and Raphael Pura, “Suharto Considers Pegging Rupiah to Dollar,” The Wall Street Journal, February 10, 1998.
Page 223: Hanke’s quote that “I know what causes currencies to blow out” comes from Paul Blustein, “The Professor Who Is Testing U.S. Patience,” The Washington Post, February 12, 1998.
Page 225: Camdessus’s letter to Suharto was reported in Paul Blustein, “Currency Dispute Threatens Indonesia’s Bailout,” The Washington Post, February 14, 1998.
Page 226: Information about the deferral of the currency-board proposal comes from Bob Davis and Jay Solomon, “Suharto’s Dukun,” The Wall Street Journal, February 23, 1998. Suharto’s statement that “whatever measure we shall take, we need the support of the IMF” comes from Richard Borsuk, “Suharto Says New Path Needs IMF Blessing,” The Asian Wall Street Journal, March 2, 1998.
Pages 232-233: Details about the third IMF program for Indonesia, and the events of April and May 1998 leading to the resignation of Suharto, come from Kenward, “From the Trenches.”
CHAPTER 9: GETTING TO NYET
An excellent and entertaining history of Russia during the Yeltsin years is Chrystia Freeland, Sale of the Century (Random House, New York, 2000). Also very helpful are Anders Aslund, “Why Has Russia’s Economic Transformation Been So Arduous?” paper prepared for the World Bank Conference on Development Economics, April 28-30, 1999; General Accounting Office (GAO), “International Efforts to Aid Russia’s Transition Have Had Mixed Results,” GAO, Washington, D.C., November 2000; and Homi Kharas, Brian Pinto, and Sergei Ulatov, “An Analysis of Russia’s 1998 Meltdown: Fundamentals and Market Signals,” Spring 2001 Brookings Panel, Meeting Draft, March 2001.
Pages 240-241: Information about the privatization campaign, and the disappointments associated with reform in the early years, comes from Freeland, Sale of the Century; Aslund, “Why Has Russia’s Economic Transformation Been So Arduous?”; Maxim Boycko, Andrei Shleifer, and Robert Vishny, Privatizing Russia (MIT Press, Cambridge, Mass., 1995); Yegor Gaidar, Days of Defeat and Victory, translated by Jane Ann Miller (University of Washington Press, Seattle, 1999); Joseph Stiglitz, “Quis Custodiet Ipsos Custodes? (Who is to guard the guards themselves?): Corporate Governance Failures in the Transition,” keynote address at the Annual Bank Conference on Development Economics—Europe; and John Nellis, “Time to Rethink Privatization in Transition Economies?” Finance and Development, June 1999.
Pages 241-242: Information about the 1995 and 1996 programs, and the disappointments associated with them including the rigged auctions of state property, comes from Freeland, Sale of the Century; Aslund, “Why Has Russia’s Economic Transformation Been So Ar
duous?”; and the GAO report, “International Efforts to Aid Russia’s Transition Have Had Mixed Results.” Among other sources is Ira Lieberman and Rogi Veimetra, “The Rush for State Shares in the ‘Klondyke’ of Wild East Capitalism: Loans-for-Shares Transactions in Russia,” a paper presented to the Second Annual Institute on Current Issues in World Trade, March 28-29, 1996.
The IMF staff report that credited the Russians for “fully complying with the quantitative targets of the program” is available from the Fund archivist, as it is more than five years old. The title is “Staff Report on the Discussions for the Eighth Monthly Review Under the Stand-By Arrangement,” December 20, 1995.
Fischer’s quote “The realistic view on Russia” comes from Michael Dobbs and Paul Blustein, “Lost Illusions About Russia,” The Washington Post, September 12, 1999.
Page 243: Figures for Russia’s budget deficit as a percentage of GDP vary by a few tenths of a percentage point depending upon the source and basis used. My figures come from Aslund, “Why Has Russia’s Transformation Been So Arduous?”
Pages 244-245: Sources on the barter and nonpayments problem in Russia include Clifford G. Gaddy and Barry W. Ickes, Russia’s Virtual Economy (Brookings Institution Press, Washington, D.C., forthcoming); and Brian Pinto, Vladimir Drebentsov, and Alexander Morozov, “Dismantling Russia’s Nonpayments System: Creating Conditions for Growth,” World Bank Technical Paper, 2000.
Anecdotes about workers being paid in brassieres and shot glasses come from David Hoffman, “Goods Replace Rubles in Russia’s Vast Web of Trade,” The Washington Post, January 31, 1997.
Information about the IMF’s efforts to dismantle the virtual economy comes from the IMF’s “Russian Federation: Recent Economic Developments,” September 1999, p. 59.
Page 245: The figure on portfolio investment in Russia comes from the website of the Central Bank of Russia, www.cbr.ru.
Page 246: Information about investment firms piling into Moscow comes from Betsy McKay, “Rushing into Russia,” The Wall Street Journal Europe, March 30, 1998; and Christopher Rhoads and Betsy McKay, “Playing with Pain,” The Wall Street Journal Europe, June 23, 1998.
Pages 246-247: Lipton spoke of being alarmed about the phrase “the latest moral-hazard play” at a 1999 IMF conference I attended.
Page 248: The $20 billion figure for foreign investment in GKOs comes from a number of sources, including William F. Browder, “Russia’s Crisis of Confidence,” op-ed article, The Wall Street Journal Europe, May 28, 1998.
Yield figures on GKOs come from the Central Bank of Russia website, www.cbr.ru.
The figure on the deterioration in Russia’s trade balance comes from the September 1998 edition of Russian Economic Trends, an invaluable source of information and statistics, www.recep.ru.
Pages 249-250: Data on the Russian government’s interest expense come from Russian Economic Trends, June 1998; and Interfax Russian News, “T-Bill Market Suffers Biggest Crisis in Its History,” July 29, 1998.
Page 252: The op-ed to which Gilman referred was Browder, “Russia’s Crisis of Confidence.”
Page 254: The White House statement is cited in Paul Blustein, “Clinton Supports New International Bailout for Russia,” The Washington Post, June 1, 1998.
Pages 254-256: Details of the Clinton-Yeltsin phone call were provided by a source with access to the transcript.
Data on developments in the GKO market in the period immediately prior to the Clinton-Yeltsin call come from Interfax Russian News, “T-Bill Market Suffers Biggest Crisis in Its History,” July 29, 1998.
Page 256: Information about Odling-Smee’s background and career comes from the IMF’s press release, “International Monetary Fund Appoints Director of New Department,” January 9, 1992.
Page 257: Details of the July 1998 program for Russia are spelled out in Kharas, Pinto, and Ulatov, “An Analysis of Russia’s 1998 Meltdown: Fundamentals and Market Signals.”
Page 259: The quote from Chubais, “Now we are safe,” comes from David Hoffman, “Russia’s Devaluation Drama,” The Washington Post, August 23, 1998.
Page 260: The scene at the Goldman, Sachs reception, including former President George Bush’s comments, comes from Christopher Rhoads and Betsy McKay, “Playing with Pain,” The Wall Street Journal, June 23, 1998.
Information about the competition among investment banks for bond deals in 1997 and 1998, especially Goldman’s activities with Menatep and other clients, comes from Joseph Kahn and Timothy L. O’Brien, “Easy Money: For Russia and Its U.S. Bankers, Match Wasn’t Made in Heaven,” The New York Times, October 18, 1998.
Pages 261-262: The projection that the Russian government faced a $32 billion debt-service outlay in the second half of 1998 comes from Kharas, Pinto, and Ulatov, “An Analysis of Russia’s 1998 Meltdown,” as does the information about the amounts of GKOs tendered by investors in the Goldman exchange.
Page 263: At the time I interviewed Al Breach, he was employed by Goldman.
The statement “With the threat of a ruble devaluation now waning” could mean trading a ‘bronco for a mule’” comes from Matthew Brzezinski and Andrew Higgins, “Ruble Rebounds, Stocks Surge 17%, Bond Yields Drop,” The Wall Street Journal Europe, July 15, 1998.
Page 264: The figures on the increase in Russia’s Eurobonds outstanding, the resulting price decline, and the fees Goldman earned come from Kahn and O’Brien, “Easy Money.”
Page 265: Figures documenting the dissipation of the $4.8 billion the Fund had disbursed are contained in Kharas, Pinto, and Ulatov, “An Analysis of Russia’s 1998 Meltdown,” p. 8.
Page 266: Information about rubles being exchanged into dollars at eight rubles per dollar comes from Russian Economic Trends, August 1998.
Page 270: Details about the meeting among Yeltsin, Kiriyenko, and Chubais comes from Freeland, Sale of the Century.
Page 272: Kiriyenko’s statement, “The measures are tough ones,” comes from David Hoffman, “Russia Devalues the Ruble to Prop up Banking System,” The Washington Post, August 18, 1998.
Camdessus’s statement of August 17 is available on the IMF website.
Pages 273-276: A transcript of this conference call comes from a Deutsche Bank web page, to which I was graciously given a password with the consent of David Folkerts-Landau.
Page 274: Information about Deutsche Bank’s exposure to the GKO market comes from Charles Piggott, “Bankers Shore up Their Assets,” The European, August 31, 1998. Information about the bank’s loss of its triple-A rating comes from John Schmid, “Deutsche Bank Slips from Top of Ratings,” International Herald Tribune, August 27, 1998.
Page 277: Soros’s quote comes from his op-ed article “The Crisis of Global Capitalism,” The Wall Street Journal, September 15, 1998.
CHAPTER 10: THE BALANCE OF RISKS
Pages 281-283: Information concerning the Fed’s thinking in 1998 comes from John M. Berry, “A Quiet End to the Fed’s Wild Year,” The Washington Post, December 22, 1998; and David Wessel, “Credit Record: How the Fed Fumbled, and Then Recovered, in Making Policy,” The Wall Street Journal, November 17, 1998. The quote from Thomas Hoenig, “Our finger was poised to push,” comes from Berry’s article.
Page 283: Greenspan’s statement that “it is Just not credible that the United States can remain an oasis of prosperity” is cited in John M. Berry, “Fed Chief Hints at Possible Rate Cut,” The Washington Post, September 5, 1998.
Page 285: The quote from the senior Treasury official about Malaysia providing “a good negative example to everybody” comes from Paul Blustein, “Financial Crises Could Stall Capitalism’s Global March,” The Washington Post, September 4, 1998.
Krugman’s Fortune article appeared in the September 7, 1998, issue.
Sakakibara’s recollection of Summers’s remark “Eisuke, the world is going to hell” comes from his article “To Brink of Global Depression and Back,” Daily Yomiuri, August 4, 1999.
Page 288: Clinton’s statement that “the balance of ris
ks has now shifted” and the other quotations about the need to focus on growth come from a transcript of the speech he delivered at the Council on Foreign Relations on September 14, 1998.
Pages 289-290: Information about how the BIS meetings work comes from John M. Berry, “Banking’s Key Players,” The Washington Post, June 28, 1998. Since the establishment of the European Central Bank in 1999, a senior representative of the ECB has Joined the gatherings.
Page 292: Speculation about coordinated interest-rate cuts based on the G-7 communiqué appeared in a number of press articles, including David E. Sanger, “Clinton Presents Strategy to Quell Economic Threat,” The New York Times, September 15, 1998; Paul Blustein, “Clinton and G-7: We’re on the Case,” The Washington Post, September 15, 1998; and Stephen Fidler, “G-7 Statement Response to Turmoil,” Financial Times, September 15, 1998.
Information concerning how the air went out of the coordinated-rate-cut balloon comes from David E. Sanger, “What Happened to Those Global Rate Cuts?” The New York Times, September 18, 1998.
Page 294: A lucid explanation of the IMF’s reasoning concerning its finances is provided in “A Peek Inside the IMF’s Vaults,” The Economist, July 18, 1998.
Page 295: Saxton’s statement that “the bottom line is that the IMF is not destitute” comes from Michael M. Phillips, “IMF and Critics Debate Accounting Principles,” The Wall Street Journal, September 28, 1998.
Page 297: The estimate that 70 to 80 percent of all corporate and mortgage lending now goes through the capital markets comes from Jacob M. Schlesinger and Paul Beckett, “Investors’ Fear of Risk Translates into a Curb on Credit for Business,” The Wall Street Journal, October 7, 1998.
Pages 298-299: The IMF description of September-October 1998 as “a period of turmoil in mature markets that is virtually without precedent” comes from the Fund’s International Capital Markets report, 1999.
Page 301: The figures on Junk-bond spreads come from Gretchen Morgenson, “The Bear Is Rampant in the Markets for Riskier Bonds,” The New York Times, September 17, 1998. Figures on emerging-market spreads come from Kerry Capell, Mike McNamee, et al., “The Fed Steps In: Will It Work?” Business Week, October 12, 1998; and the IMF’s 1999 International Capital Markets report, which cited the doubling in spreads for Mexico and South Korea.