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Two Crises Shake Foreign Stock Markets
By Paul Blustein and Sandra Sugawara The plunge in stock prices hit financial centers from Hong Kong to Frankfurt to Johannesburg, evoking memories of the globe-girdling flight of capital that devastated markets last fall. Yesterday's sell-off initially hit U.S. stocks, too, with the Dow Jones industrial average down as much as 175 points at midday before rebounding to close down just 27 points. Among the hard-hit markets yesterday were Hong Kong, where the main stock index fell 5.3 percent; Indonesia, where stocks tumbled 3.9 percent; and Frankfurt, where share prices skidded about 3 percent. In Eastern Europe, which is closely tied economically to Russia, Polish share prices fell 3 percent to a four-month low and Hungarian stock prices dropped 3.4 percent to the lowest level since December.
The darkest storm cloud hangs over Russia, whose main stock index plummeted another 10.5 percent yesterday, bringing its losses this month to 40 percent. In response, the Russian government tripled short-term interest rates yesterday to 150 percent in a desperate attempt to make investments in the country more attractive and keep the ruble stable. [Details, Page A30.] Moscow's holdings of foreign currency reserves have dwindled to the dangerously low level of about $14 billion, arousing fears that one of the world's biggest countries -- which has borrowed heavily from U.S. and European banks -- might soon run out of the cash it needs to meet its foreign obligations. The Russian crisis has erupted just as Asia's problems are worsening, and the two crises are feeding off each other. Analysts said investors are dumping securities almost indiscriminately in developing nations -- including Latin America, where markets have also fallen this week despite a dearth of economic news. Brazil's main stock index finished with a gain of 3.3 percent yesterday on the strength of the rebound in New York, but that was only after a plunge that drove it to its lowest level in more than five months. "It's very serious, because if last year's problem was Asian contagion, now we've got a more general kind of portfolio contagion," said Richard Medley, principal at Medley Global Advisors, which counsels international investment firms. "People may say, 'I can explain to my superiors why I lost money last year in places like Asia, but I won't be able to explain why it's happening again this year.' " In some respects, the sell-off in emerging markets may prove a mixed blessing for the U.S. economy in ways similar to the Asian crisis. Many sellers of foreign securities are pouring their cash into U.S. Treasury bonds, which helps keep interest rates low in the United States. But the Asian crisis has also hurt the U.S. economy and workers by dampening demand for U.S. exports, and if more developing countries follow Asia into dire straits the impact on overseas sales of American goods could prove even worse. Particularly worrisome is the spread of the panic to Russia, which raises the prospect of social chaos in a country that Medley called "Indonesia with nukes." The Clinton administration sought to quell investors' worries by assuring markets that help is on the way for Russia, which has been engaged in difficult negotiations with the International Monetary Fund to obtain a $700 million loan that was held up amid a dispute over how to narrow the country's budget deficit. "We understand that the Russians and the IMF are closely engaged [in discussions], and we hope for a prompt agreement on strong measures that will get Russia back on their IMF program and earn strong IMF support," Lawrence H. Summers, deputy secretary of the treasury, told reporters. The administration also expressed confidence in Russia's economic team as highly competent. But Summers refused to comment on the possibility the IMF's $9.2 billion rescue package for Russia might be expanded. Russian officials have strongly hinted they want such an increase in funding, which would put both the Clinton administration and the IMF in a quandary because the fund's resources have been badly depleted by bailouts the fund has led for Indonesia, Thailand and South Korea. But some analysts said Washington will have little choice. "Time is of the essence," said Paulo Leme, director of emerging-markets research at Goldman Sachs & Co. He argued that an increase in the IMF's aid package for Russia "is the catalytic element that is needed" to change market sentiment by convincing investors that Moscow will be able to avoid default. "In the big scheme of things, Russia is much more important than Indonesia or Thailand, both because of the size of its economy and the exposure of U.S. and European financial institutions." Russia's financial problems stem in part from the recent fall in world petroleum prices -- the country exports oil -- and from the government's inability to collect taxes from rich and powerful companies and individuals. But its troubles have been exacerbated by the contagion effect from Asia -- where markets appeared to be recovering earlier this year but have recently tumbled amid concern about spreading bankruptcies and layoffs. On the surface, it might seem illogical that turmoil in Asia would affect Russia, or that a crisis in Russia would spill over to Latin markets. But, said Goldman's Leme, "if there's a tremendous sell-off in, say, Russia, most likely some investors will have suffered enormous losses, and will sell their holdings in other countries to make up those losses." Making the vicious circle worse, he said, are mutual funds that invest in emerging markets. They have been forced to sell substantial amounts of their holdings to raise cash, because investors alarmed over the growing risk of foreign investments have been redeeming their shares in the funds. Yesterday's developments underscored the possibility that the worst of the Asian crisis, now 10 months old, may lie ahead. One possible omen of problems was yesterday's fall in the Hong Kong market, which followed comments by Hong Kong chief executive Tung Chee Hwa, who warned that Hong Kong -- which has been relatively sheltered from the region's turmoil -- might soon report its first negative economic growth in a decade. The new pessimism is hitting Japan, too. Moody's Investors Service yesterday downgraded credit ratings for five major Japanese banks and placed four other banks under review for possible downgrades. Moody's said Japansese banks are now facing a "third wave" of problem loans because of Japan's weakening economy. This latest blow for the banks comes on top of existing problems resulting from the crisis in neighboring Asian countries and the collapse of Japan's "bubble" economy in the early 1990s. Moody's also said Indonesia has a "broadly insolvent banking system," with about 75 percent of all loans unlikely to be repaid. Despite President Suharto's resignation, Indonesia's economy is still shaky after rioting that left large parts of the nation's cities in ruins. South Korea, meanwhile, is showing signs of losing the investor confidence it gained earlier this year when its new president, Kim Dae Jung, embarked on an economic reform program. Korean share prices rose 0.5 percent yesterday, but that was after two days of losses greater than 6 percent that put the main stock index at an 11-year low.
Sugawara contributed to this report from Tokyo.
© Copyright 1998 The Washington Post Company
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