Sovereign default/Addendum

Russia's default, 1998

By 1997 Russia's central bank had achieved a major improvement in the country's financial stability, having reduced its inflation rate to 11 percent from its 1994 rate of 224 percent, and the depreciation of its exchange rate to 7 percent from its 1995 30 per cent rate. The budget deficit had been rising rapidly, however, and debt repayments were absorbing a substantial proportion of tax revenue. There were fears that further use of high discount rates to control inflation and maintain its exchange rate within its announced ("crawling peg") limits would hamper economic growth and further increase debt repayments . To make matters worse, a fall in the world price of oil caused a nearly 18 per cent year-on-year deterioration in Russia's terms of trade and the Asian banking crisis had drastically reduced investors' confidence in emerging market economies. There were two speculative attacks on the Rouble in the course of 1998 and an unsuccessful negotiation for support from the International Monetary Fund; and in September the government announced a suspension of debt repayments and the adoption of a floating exchange rate policy.

The magnitude of the default broke previous records and created a further loss of investor confidence with internal repercussions that may even have contributed to a subsequent default by Brazil .

Argentina's default, 2001

Argentina also used exchange rate regulation in a successful attempt to reduce its inflation rate, but in Argentina's case the most damaging reaction came from of own citizens rather than overseas investors - although there was also a succession of risk rating downgrades by the rating agencies. The attempt to maintain a fixed rate of exchange with the US dollar added to the depth of a persistent recession, causing hardship that provoked a series of general strikes that led finally to the collapse of the government. Unlike the Russian crisis, the problem did not arise suddenly but had been the subject of long-standing policy advice and financial support from the International Monetary Fund (whose policy toward Argentina was later judged to have been mistaken) .