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Goodman: crisis to spread
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August 27, 1998: 12:48 p.m. ET
Analyst sees parallels in 'reckless' financial policies of Russia and Brazil
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NEW YORK (CNNfn) - As the ruble continued to slide Thursday, the Russian government said it was considering extreme steps to stabilize the economic situation.
But the problem seems to be worsening. Lawrence Goodman, an international economist at Santander Investment, appeared on "Before Hours". He says Russia's currency crisis likely is going to spread to other emerging markets.
Here's a partial transcript.
DEBORAH MARCHINI, CNNfn ANCHOR, "BEFORE HOURS": To what extent does the Russian economy -- very small compared to the United States -- affect financial markets around the globe?
LAWRENCE GOODMAN, INTERNATIONAL ECONOMIST, SANTANDER INVESTMENT: Well, I think that the principal interplay between the Russian economy and other economies in the world is pure psychology. Russia's share of world GDP is only 1.8 percent, of which Russia only trades about 10 percent. So, from an economic vantage point, Russia is relatively small. That being said, the psychological impact is tremendous. This is the first debt default that the emerging markets have seen in many years going back to the '80s, coincident with the debt crisis.
We came very close in 1994 and 1995, coincident with the Mexican peso debacle, but what investors saw was that tesobonos, or Mexican government securities, converged to U.S. government securities and there was no default. This is really a shift in the international landscape.
MARCHINI: This is pretty much an out-and-out default at this point?
GOODMAN: This is unequivocally a default. I think that last Monday, the dual hit was not only the currency devaluation, but a default simultaneously. So, there was a complete loss of confidence in the currency, as well as the ability of the authorities to repay local currency obligations, and the risk here is that this is going to spill into external obligations, as well.
MARCHINI: What about the risks to the financial system? Banks have not only lent money directly to Russia, but they've lent money to hedge funds and other investors who have speculated in Russia.
GOODMAN: I think that the hit to financial institutions is going to be undeniable. With a country's securities collapsing in prices, the hit to holders of GKOs, both in terms of Russian banks, which has been extensive, as well as other international financial institutions, is clearly going to be an impact on international markets.
The other parallel that has been brought up this morning which is the real concern in the markets this morning -- and one of the reasons why the German equity market was off so substantially -- is fears of lower exports into Russia which, from our vantage point, is beginning to be an over-accentuated view in terms of the real importance that Russia plays in the global economy.
MARCHINI: Why is this hitting Latin America and South America so hard?
GOODMAN: There are tremendous parallels between how Russia ran a relatively reckless fiscal policy in tandem with how the Brazilians and many other central banks and ministries of finance in Latin America did as well. There are, however, a number of discrete parallels and breaks whereby fiscal policy in Brazil is extremely different than Russia. The Russians were running a 6 percent of GDP budget deficit -- completely unsustainable if, in fact, they only have 10 percent of GDP in revenues; very different in Brazil.
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