Markets face rough ride as deal collapses

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The Independent Online
GLOBAL MARKETS face another roller-coaster ride today following last night's dramatic collapse of a political deal in Russia that could have paved the way for economic recovery. Instead, more political turmoil in Russia appears inevitable.

Earlier yesterday Western leaders had given cautious approval to what appeared to be a compromise deal between the Duma, the Russian parliament, and Viktor Chernomyrdin, the acting prime minister. However, the Communist members of the Duma abruptly withdrew their support for the confirmation of Mr Chernomyrdin as prime minister.

Also yesterday, a leading German banker warned America that President Clinton's visit to Moscow this week should not be used as an excuse to argue for favourable terms for US lenders. President Boris Yeltsin is due to host the American President on 1-3 September for talks on the financial crisis.

Martin Kohlhausen, the president of the German banking federation, said he was concerned the US would seek preferential treatment in Russian debt restructuring in the visit. "I don't think this is primarily about providing further money to clean up Russia's finances, but is a race by creditors and investors. The Americans want preferential treatment in debt adjustments," he said.

Mr Kohlhausen said that all Russia's international creditors should be treated equally. Germany is Russia's largest foreign lender with an exposure of over pounds 25bn.

"If there is preferential treatment as a result of political pressure I would not be impressed," said Mr Kohlhausen, also chief executive of Commerzbank. "That would promote the feared lopsided development of the world financial system."

But Mr Clinton's visit may be overshadowed by the political upheavals in Moscow. Western observers and Russian reformers are worried that the Communists in the Duma want to "turn the printing presses back on" and issue extra roubles, risking hyperinflation.

Earlier, when the compromise deal appeared to have been clinched, the Clinton administration said that continued financial support still depended on actual reforms in Russia. Lawrence Summers, the Deputy Treasury Secretary, said yesterday: "What is crucial is not words at this point, but the actions the Russians are able to take at what is a critical juncture for them and their management of the economy."

Mr Summers said the terms of Russia's IMF package would have to be renegotiated before any new IMF loans could be discussed.

Michel Camdessus, the IMF managing director, said on Saturday that Russia would get the next $4.3bn instalment of its $22.6bn bailout if it put economic reforms in place. It will get the money if it is "able to make the homework by a given date in September" and if "all actions needed to restore stability are taken," he declared.

Even before the events last night, analysts were gloomy over the markets' prospects. Gerard Lyons, chief economist at DKB International, said: "Stock markets in the US, UK and Europe have discounted too much good economic news. As the crisis intensifies, they continue to look vulnerable."

There have been continued calls for cuts in interest rates around the world to counter the crisis, but analysts said cuts could still be some way off. "Asset price inflation has been a central fear of central bankers this year; in other words stock markets have been seen as too high," Mr Lyons said. "It is unlikely that a fall in stock markets will trigger rate cuts until declines seem sharp enough to threaten the economy."

The Financial Services Authority and the Bank of England have formed a special committee for daily monitoring of Western banks and their exposure to the Russian crisis.

In Japan the Economic Planning Agency Minister, Taichi Sakaiya, expressed bitterness that Russia had failed to promote a Western-style economy while lawlessness had taken hold. "We hoped Russia would achieve a market-oriented economy, but it didn't. In fact, it is a mafia economy."

One man who still holds out hope for Russia is Domingo Cavallo, the former economic minister of Argentina, who flew to Moscow at the Russians' invitation on Saturday to help. Mr Cavallo is credited with defeating Argentina's hyperinflation.

Mr Cavallo, a Harvard-trained economist and contender in presidential elections next year, told La Nacion newspaper he would have to speak to members of Russia's government before recommending any solutions.

Asked if he would suggest a convertibility plan like the one he introduced in Argentina in 1991, Mr Cavallo said: "For me, it is key to have a solid and trustworthy currency."