Tuesday, August 18, 1998 Published at 15:35 GMT 16:35 UK
Business: The Economy
Banks in the balance
Many are worried that there may be a run on the banks
The Russian banking sector is reeling from the effects of the devaluation of the rouble. But the major banks are clubbing together to save themselves.
The financial sector has virtually ceased functioning as inter-bank lending has dried up, and the government bond market has been suspended.
And with confidence drying up, there is a danger of a run on the banks as small businesses and individual savers stop transferring money into bank deposits.
Already a substantial portion of savings - estimated at $75bn - is kept outside the banking sector.
Some analysts believe only 10% of the country's 1,500 banks will survive.
"There is going to be a collapse of much of the banking sector," said Jeff Robins, an economist at Renaissance Capital.
Bank rescue plan
In response to the liquidity crisis, the 12 biggest banks have clubbed together to support each other by pooling their resources.
The central bank has agreed to provide hard currency to support them. But it says that any bank that gets into difficulties may have to give up part of its equity as collateral.
"The banks will be required to meet all commitments, and if one of them has financial problems the pool and central bank will set Lombard terms, possibly even requiring a controlling share as collateral," said Inkombank president Vladimir Vinogradov.
The 12 leading banks that are working together are Rossiisky Kredit, Alfa- Bank, Sberbank, Vneshtorgbank, Vneshekonombank, SBS-Agro, Menatep, Most-bank, Inkombank, National Reserve Bank, Oneksimbank and the Moscow Company for Investment and Finance.
The devaluation of the rouble has crippled the banking sector, which has borrowed money in dollars that will now be more expensive to repay.
But the day of reckoning has been postponed by the government's decision to suspend payments on foreign debts.
The government also wants to restructure its domestic debt, known as GKO, which has been financing the deficit on a weekly basis.
But details of how the debt would be reorganised are unclear, leading some observers to argue that the government plans were hastily put together.
Many banks still do not know what debt instruments have been suspended, and whether they are voluntary or mandatory.
The central bank says it will meet the banks on Monday to seek a "market based framework for the orderly resolution of the current problems."
But the moratorium and devaluation will hit foreign confidence hard.
Tax revenues needed
In the longer term, increasing tax revenues is crucial to reviving faith in the credit system. If the government deficit is reduced the government would not have to issue so much short-term debt which is running through the system.
"The tax regime is crucial. If the tax regime was generating more money then the government would be entirely able to meet the debt payments," said Richard Hainsworth of Thomson Bankwatch.
And raising more taxes will be crucial in rescuing the banks - otherwise the government will just have to print roubles, further boosting inflation.
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