俄罗斯结束危机的唯一途径

The meltdown in Russian financial markets has reached the terminal phase. Bankers and brokers who had borrowed against securities could not meet margin calls and forced selling swamped both the stock and the bond markets. The stock market had to be temporarily closed because trades could not be settled; prices of government bonds and Treasury bills fell precipitously. Although the selling was temporarily absorbed, there is a danger that the population will start again to withdraw funds from savings accounts. Immediate action is required.

The trouble is that the action that is necessary to deal with a banking crisis is diametrically opposed to the action that has been agreed with the International Monetary Fund to deal with the budget crisis. The IMF program imposes tight monetary and fiscal policy; the banking crisis requires the injection of liquidity. The two requirements cannot be reconciled without further international assistance. The IMF program had assumed that there would be buyers for government bonds at a price: as the government proceeded to collect taxes and slash expenditures interest rates would come down and the crisis would abate. The assumption was false because much of the outstanding debt was held on margin and credit lines could not be renewed. There is a financing gap that needs to be closed. The gap will become bigger if the general public starts withdrawing deposits.

The best solution would be to introduce a currency board after a modest devaluation of 15 to 25 per cent. The devaluation is necessary to correct for the decline in oil prices and to reduce the amount of reserves needed for the currency board. It would also penalize the holders of ruble- denominated government debt, rebutting charges of a bail-out.

About $50bn of reserves would be required: $ 23bn to cover MI and $27bn to cover the shortfall on domestic debt refunding for the next year. Russia has reserves of $18bn; the IMF has promised $17bn. The Group of Seven needs to put up another $15bn to make a currency board feasible.

There would be no bail-out of the banking system. With the exception of a few institutions that hold public deposits, banks can be allowed to fend for themselves. Government bond prices would immediately recover and the sounder financial institutions would survive. Some $40bn is held by Russians in foreign currencies. With a currency board they may be tempted to buy ruble- denominated government bonds at attractive yields. If they do, the G7 standby credit would not need to be used. The reduction in interest rates would help the government to meet its fiscal targets.

If the G7 were willing to put up $15bn right away, the situation could be stabilised even without a currency board, although it might take longer and the damage would be greater. It would also be difficult to accomplish a limited currency adjustment without a currency board because the pressure for further devaluation would become irresistible, as it did in Mexico in December 1994.

If action is delayed, the cost of a rescue will continue to mount. The cost would have been only $7bn a week ago. Unfortunately, international financial authorities do not appreciate the urgency of the situation. The alternatives are default or hyper-inflation. Either would have devastating financial and political consequences.