Twenty years ago this week Russia devalued, defaulted and suffered a catastrophic bank run. The chaos opened the door for Vladimir Putin, who emerged from the financial bedlam to drag Russia back from the brink.
In mid-August 1998, people in Moscow could not understand how the small crisis in Thailand of 1997 could engulf a country such as Russia that did hardly any trade with faraway Thailand. How could these countries be related?
In commercial terms they were linked by the umbilical cord of international finance. And what happens when there is too much debt in the international financial system and too much interrelated borrowing? The entire edifice becomes fragile and susceptible to contagion, as crises jump from country to country.
In my time working in financial markets, I saw such viral destruction happening three times in only five years: Mexico in 1994, Asia in 1997, then Russia and eastern Europe in 1998.
Could the same disruption be happening again, as currencies and stock markets in emerging markets slump? And, if so, what will be the political consequences? Remember when Putin was named prime minister of Russia, people thought he would be the next in a line of temporary, ineffectual apparatchiks who had feebly carried out orders under President Boris Yeltsin.
The epicentre of today’s crisis is Turkey. Its currency has lost more than a quarter of its value in the past two months, and it is in the eye of the storm. It is one of the biggest power brokers in the Middle East, home to the second-largest standing army in Nato, and its president wants to tear up the last century of constitutional secularism.
Turkey is no Thailand. It is a hugely significant regional player. Is it a “one off’ or the harbinger of international financial contagion?
Before trying to answer that, it is worth considering that the 1997-1998 crisis was ultimately stabilised by an outward-looking US Federal Reserve that cut interest rates, easing global liquidity conditions and making it easier for some countries to pay their debts. The International Monetary Fund was active in extending loans to countries that had run out of credit, and the Clinton administration was extremely internationalist.
Today, global politics is in an entirely different mood. Nativist governments are in power in the US, the UK and Italy. Large parts of the Middle East – from Yemen to Iraq and Syria, functioning societies in 1998 – are destroyed and violent. The US is threatening sanctions against Turkey and Iran.
Populist politics reigns and its roots are deep. Trump won 45.9 per cent of the US vote, with the support of 62,985,106 people. In France, Marine Le Pen may have been well beaten in the presidential run-off, but she still managed to claim 33.9 per cent of the electorate or 10,637,120 votes.
In Italy, the populists have the backing of well over 16 million voters – just over half of the electorate. In Germany, the AfD has gone from no seats in the Bundestag to the third largest with 12 per cent of the vote. Even in tolerant Sweden, the Swedish Democrats might actually emerge as the biggest party after the election in two weeks’ time.
All over central Europe nativist parties are in power. And rather than extending help, the Trump administration is ratcheting up tariffs and threatening trade wars.
This is hardly the best backdrop for a co-ordinated international response to a financial crisis.
In contrast to 1998 or indeed 2008, the Federal Reserve is now raising interest rates, driving up the dollar, and the rising dollar is the trigger for these crises. The emerging markets have been borrowing heavily since 2008 but as these debts are incurred in many cases in dollars, when the dollar rises and US interest rates go up, the emerging country has to generate more and more revenue to pay down the same amount of debt.
Worldwide debt in 2008 was 200 per cent of global GDP; today it is 240 per cent. Debts have risen most sharply in the emerging markets, and in China in particular, where total debt has risen by a staggering 110 per cent of GDP to 260 per cent of GDP between 2010 and 2018.
This brings us to the main change in the global economy since the previous crises 20 years ago: China. The US economy emerged in the 1880s and 1890s to become pre-eminent by 1920; the Chinese economy is on a similar trajectory.
Like the US, this path will not be without its financial and economic upheavals.
China holds the key to whether this current financial crisis is limited or becomes more significant. Since 2008, China has been expanding, borrowing to grow, and, on its upward surge, investing hugely. Internally, debts have been rising and, like Ireland in our credit-inspired boom, the growth rates themselves tell you very little about what is actually going on.
If the growth rates are generated simply by more and more credit, then we have a recipe for disaster, because the increase in GDP is rented, not earned. Since Trump announced his trade war with China, the Chinese currency has lost 7 per cent of its value. It’s worth remembering that the middle kingdom exports $500 billion to the land of the free. If China can’t sustain these exports, the knock-on to the internal, debt-laden economy will be profound.
Trump appears to be quite happy to risk an international financial meltdown in order to prove a point – and that point is “Don’t mess with America” – even though international trade has enriched the US for generations.
All the while, worried money flows into the US from emerging markets, pushing up the dollar further. And Europe is not immune to this.
European stock markets have been extremely weak compared with those in the US this year. Politically, the European Union is threatened by migration resulting from increased instability on its southeastern border.
In terms of debt dynamics, Italy is vulnerable given its mix of slowing growth, high unemployment, populist government and large overhanging national debt. This makes it more exposed to the vagaries of worried investors.
At times like this, the world needs global leadership; this appears to the commodity in shortest supply.