Publication: Monitor Volume: 7 Issue: 88

The 1997-1998 financial crises in Russia and East Asia generated numerous calls for reform of the international financial system. Among other things, critics lambasted bailouts by the IMF and World Bank which allowed developing crisis-stricken governments to continue to repay debts to private bondholders while taxpayers in G-7 countries were left holding the bag. This is because the Paris Club of sovereign creditors–that is, G-7 governments–have generally been more willing to reschedule of forgive debts than have been banks or other private creditors. This practice had led to calls for “bailing in” the private sector to ensure that some of the losses from financial crises are born by the wealthy banks and other private investors most able to afford them.

In Russia, private creditors have been bailed in with a vengeance. Indeed, virtually all of Russia’s post-August 1998 debt forgiveness has come from private creditors. The investment banks and other private investors holding billions of dollars worth of Russian treasury bills (GKOs) in August 1998 were ultimately left with little more than pennies on the dollar. This FTO and London Club deals together gave Russia more than US$12 in foreign debt forgiveness. By contrast, G-7 governments and the IMF have taken a much tougher line–and gotten away with it. The Paris Club’s categorical refusal to consider Moscow’s request for debt forgiveness or rescheduling in 2001 is what is responsible for the near tripling of Russia’s foreign debt payments in the first quarter of this year. Although the Paris Club agreed in August 1999 to reschedule Moscow’s sovereign debt falling due during 1998-2000, this rescheduling did not feature the forgiveness present in the London Club, FTO and GKO deals. Moscow has faithfully covered its IMF obligations, and since the Fund has only provided US$640 million since August 1998, Russia’s debt to the IMF fell from US$19 billion in 1998 to US$11 billion by the end of last year.

To be sure, Russia’s creditors have suffered much less from the August 1998 financial collapse than ordinary Russians did. But the fact that private creditors’ losses in Russia have exceeded the losses incurred by G-7 governments and the IMF suggests that demands for reform of the international financial system to “bail in” private creditors may be misplaced.