The moratorium on government debt caused large losses to foreign banks as the value of
the debt was written down, and additional losses resulted from the abortion of forward exchange
contracts under the moratorium on selected external obligations. For Russian banks the losses
associated with the crisis are estimated at 40 per cent of their assets.7
The events and the
emergency policy response took place during a period when Russia was formally observing an
IMF stabilization programme.
At the outbreak of the crisis the total exposure of non-residents to the Russian economy
in the forms of debt and equity amounted probably to $200-250 billion, though subsequent falls
in asset prices are likely to mean that the figure is now lower.8
The exposure is unequally
distributed, a high proportion being concentrated among West European lenders and investors.
This figure constitutes a very small fraction of investors’ and lenders’ global external exposure:
in the case of German banks, for example, whose lending to Russia amounts to more than 50 per
cent of the total by international banks, their assets in Russia are less than 5 per cent of their total
foreign assets.9
But despite the small scale of international exposure to Russia, the emergency measures
taken by its government nevertheless were accompanied by significant declines in prices in
international financial markets, substantial downward revisions in forecast levels of capital inflows
to developing and transition economies, and unfavourable shifts in indicators of such economies’
- 11 -
10 For the definition of yield spreads see chart 1.
11 Declines in equity prices were recorded in all 23 of a group of the main emerging financial markets during
August 1998 by amounts which varied from 10 per cent or less in Hong Kong China, India, and Republic of Korea
to more than 25 per cent in more than one-half of the sample.
12 See Trade and Development Report, 1998, Part One, chap. III, chart 2.
13 The downward revisions in forecast capital inflows involve principally 1999, those for 1998 as a whole
being affected to only a limited extent by recent developments. As of late August J.P. Morgan is forecasting a decline
of about 35 per cent in capital inflows to developing and transition economies in 1999 (down from a decline of less
than 5 per cent forecast at the beginning of July), a substantial part of this decline being accounted for by Latin
America; see J.P. Morgan, Global Data Watch, 28 August, p. 2. The International Institute of Finance is at present
forecasting little overall change in capital flows to 29 major emerging market economies but a decline of more than
10 per cent for Latin American members of the group; see International Institute of Finance, Press Release, 29
September 1998.
creditworthiness as the yield spreads10 on their external bonds in secondary markets. The
pervasive declines in equity prices, which were particularly large in several emerging financial
markets,11 reflected partly investors’ liquidation of positions elsewhere to make provision for their
losses in Russia, but were also influenced by a reassessment of price levels in stock markets more
generally associated with fears that financial disturbances might produce a global recession.
Despite a continuation of relatively high yield spreads in secondary markets on the international
bonds of most borrowers from developing and transition economies in the first half of 1998,12
forecasts by various financial institutions for capital inflows remained relatively optimistic.
However, since the outbreak of the Russian crisis these forecasts have been revised downwards,
the changes being substantial, for example, in the case of Latin America.13 The reassessment of
the creditworthiness of borrowers from developing and transition economies has also been
reflected in a virtual standstill of their international issues of debt instruments and in increases in
the already fairly high levels of the yield spreads on their international bonds in secondary
markets just mentioned
