Yeltsin's promotion of the tough and
experienced Boris Fyodorov as Deputy Prime
Minister'. When Boris Fyodorov, who actually is an obese crook, was head of the Russian Dept in the London HQ of the European Bank for Reconstruction and Development in 1990, he tried to sell me a Russian cornflake factory. When I told him I had no money for such a purchase, he offered me a soft-drink bottling plant instead...
Mark Jones]
'Thank God the leak isn't at
our end of the boat'
Anthony Harris
The sound of thunder all round the horizon.
Russia devalues and suspends foreign debt
payments. China declares against devaluation, but
the Hong Kong authorities are driven into direct
intervention in the markets. In Japan, now in an
officially confessed slump, the Nikkei lurches
below the 15,000 level.
Countries from the Far East, through Texas to
southern Europe face the ravages of El Niño; yet
commodity prices still fall. The Bank of England
and the US Federal Reserve warn of inflationary
pressures at home. And the London equity
market? It wobbles a bit, while gilts achieve new
highs.
Calm nerves, or just heads in the sand? It is true
the troubles are still a long way away
geographically and that widespread recession
outside helps to restrain prices in more fortunate
countries. But if, as we are constantly told, this is
a global economy served by a global financial
market, can troubles really remain localised?
Perhaps the most apt comment was made
prophetically an age ago by the late cartoonist
David Low. His picture showed a lifeboat, sinking
by the stern. At the wet end, peasants of many
nations, bailing desperately. At the dry end, a
group of silk-hatted financiers: "Thank God the
leak isn't at our end of the boat."
The world slump followed shortly afterwards. All
right, we have learnt a great deal about managing
emergencies in the past 70 years, so maybe
another 1929 really is unlikely. But no worries,
after all? Perhaps a more helpful analogy was
provided (not much later) by my small sister. She
was complaining pitifully about an earache.
"You're not ill, darling; it's just your ear," she was
told. "I know, but I'm fixed on to it," came the
reply. The little girl was right: earache deserves to
be taken seriously. The right reaction is neither
complacency nor panic, but careful diagnosis.
Russia first. Is this a real crisis or just a financial
squall? If you look only at the numbers it does not
look too bad. The country was until this year in
comfortable current account surplus, thanks to oil,
and its financial crisis is largely oil-price related - a
side-effect of collapsing Asian demand. This has
hit both the foreign balance and the Government's
tax revenues.
Devaluation, which will sharply raise the rouble
prices of oil, is the logical answer at least to the
revenue problem, provided that oil taxes can be
collected, which is at least not impossible any
more.
So George Soros was right all along? It is not quite
as simple as that. The foreign balance will not
respond in the short term; dollar oil revenues are
still down. But this again is a problem we have
learnt to handle. Indeed, the IMF has a special
facility for commodity related finance; only its
officials can explain why Russia was not given an
oil bail-out rather than the banker's rescue which
is, in fact, on offer. Perhaps the officials can even
now have second thoughts. It might restore their
market credibility.
Failing this, the Russian moratorium on foreign
debt service is a sensible first step. Indeed, an
indefinite moratorium, or even an outright default
on tsarist lines, would be easy to defend. Russia's
internal stability is far more important, not only to
President Yeltsin, but to the rest of the world, than
whether a few banks take a hit. As prewar
experience showed, even a defaulting country can
become creditworthy again surprisingly soon if it
achieves domestic stability. But internal stability is
now the big problem.
It is a pity that President Yeltsin told his obligatory
lies about devaluation in quite such ringing terms:
the immediate reaction is that Russian citizens are
unloading roubles. Will Mr Soros have to mount a
counter-raid in support of Yeltsin's credibility?
Japan's crisis is, at heart, remarkably like Russia's.
The numbers look acceptable, so that sober
economists are still forecasting an economic
upturn before the end of this year. The policies, if
they are carried out - always a very big "if" in
Japan - follow all the most respectable advice. The
US Treasury demands a big fiscal stimulus. This is
just what is proposed - if you believe the official
numbers.
The IMF demands financial deregulation. It is
desperately needed, for until the credit market is
truly opened, the Japanese small companies
sector, the only potentially dynamic part of the
economy, will remain throttled for want of
expansion money and even working capital. As
with reflation, the plans are in place, even if they
do stick in the throats of those LDP factions with
strong banking links.
But even if the Japanese Government does, in
desperation, bite the bullet, the central problem
remains - the people. A discredited regime may
sound all the right bugle calls, but the citizens are
no longer listening. They have seen job security
vanish, pay is being cut and they now find their
pensions in question. Meanwhile, high street prices
are falling. For the citizen, everything points to the
same conclusion: spend less, save more against the
coming storm. So the fiscal stimulus will largely
vanish into savings accounts; and since the
domestic financial market offers miserable returns,
much will be invested overseas. Result: continued
slump, a huge current surplus, yet an ever-weaker
yen. As in Russia, speculators might lighten the
financial gloom: at some stage bargain-hunters will
revive the yen and the Nikkei. But the core
problem, an ageing and disillusioned population,
will remain.
Only a fool, then, would simply hope that Russia's
problems, or Japan's, will simply blow over. The
real question is how much they matter to the rest
of us; and here a little hope does make sense.
Neither of these largely closed economies is an
important source of demand for the rest of the
world: only of supply - oil and gas from Russia,
finance capital from Japan. China and the
wounded "tigers" of South-East Asia are much
more significant, especially on a forward view, and
their prospects do not look so black.
The most immediate threat is that the weak yen
will undermine all Asian currencies, even though
most are already too low for comfort. The
sophisticated defence mounted in Hong Kong
offers some reassurance. It was timed to punish
speculators sharply. The core Asian problem
remains, of course: the regional collapse of real
investment - a natural correction of the excesses of
the earlier Nineties (excesses which are also
destroying jobs in the UK).
With subsistence threatened by devastating
weather, it might seem that their situation could
hardly be worse. That, though, could be the silver
lining; for Asia's troubles are well understood in
the markets and, unlike Japan, they have not
resisted market adjustments. Little scope is left,
then, for nasty surprises, so their financial crisis is
probably past its worst.
It is the capital markets of the West that may still
be in a fool's paradise. Despite the correction
already achieved this year, prices still seem to
allow too little for the squeeze on profits, which is
bound to result from a world growth recession, to
use the mildest realistic term.
On the contrary, the sharp reaction to nearly every
profit warning shows all too much scope for
downside shocks. Those who believe that markets
put a rational price on the future ought to be
thoroughly alarmed.
Why, though, are prices so seemingly blind? The
real question is what has driven the world bull
market. This is partly a question of demography -
the trend in all Western countries to look to the
markets for old-age provision, a trend which has
only now set in across euroland. And it is partly
the recession itself. Companies which are reluctant
to spend on real investment feed their funds back
into the market through share buy-ins and
takeover bids. Equities are supported not so much
by dreams of ever-rising profits as by well-justified
bid speculation.
World recession is also inspiring a worldwide flight
into quality. Internationally, that means dollars first
and foremost. Within markets, it means bonds.
The advance of gilts and US Treasuries has been
so stealthy that there has been surprisingly little
comment on it; yet anyone who switched into
bonds at last year's equity peaks has enjoyed
another record investment year, despite all the talk
of 1929. To be sure, there are limits - Japanese
bonds, especially, look wildly overpriced, but real
yields in the English-speaking markets are still
quite sensible.
The chances still look good that in the West the
bull market still has a little life in it; and that it will
end, when it does, not with a clap of thunder but a
slow, expiring sigh.
-Copyright 1998 Times Newspapers Ltd.