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The Perils of Lending to the Bear
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15945 |
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BOOK WORLD
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7 / 1989 |
1,868 Words |
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Juliana Geran Pilon
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THE COMING SOVIET CRASH
Gorbachev's Desperate Pursuit of Credit
in Western Financial Markets
Judy Shelton
New York: The Free Press
246 pp. $22.50
While the Western media has been filled with speculations about the meaning of Mikhail Gorbachev's new economic policies, a much less publicized reality is the escalating Soviet--and Soviet bloc--dependence on Western credits to keep the communist engine from running out of gas entirely. In fact, two years after Gorbachev's assumption of power in 1985, Soviet debt to the West shot up from roughly $25 billion to over $37 billion--an increase of nearly 50 percent.
Dramatic as this figure is, it pales in comparison with another statistic: The rise in the net hard-currency debt of the entire Soviet bloc in the last decade is up from $7 billion in 1970 to a staggering $62.9 billion in 1980. This figure clearly illustrates the crisis that has turned Marxist economics into an oxymoron.
Yet accounts of that crisis have been rare. A notable exception is a recent study by Judy Shelton, a research fellow with Stanford University's Hoover Institution on War, Revolution, and Peace, boldly and ominously entitled The Coming Soviet Crash: Gorbachev's Desperate Pursuit of Credit in Western Financial Markets.
The book starts out by looking at the financial condition of the Soviet Union, including that government's hopeless inability--exacerbated by unwillingness--to estimate its own expenses and its self-defeating attempt to print more money to rescue inefficient enterprises. Second, it analyzes how Moscow acquires outside financing and why the West extends credits. Finally, Shelton provides a set of guidelines, warnings against wishful thinking, and reminders that good business sense usually makes good foreign policy as well.
Above all--as her title makes clear--she asserts that the Soviet Union's economy is not undergoing a temporary slump but is in deep, systemic trouble, with no obvious or immediate prospect of recovery. If the economic survival of our military and ideological rival is at best doubtful, if default is highly probable, the idea of extending massive credit to the USSR is quite bizarre.
Loopholes
Most credit comes from Western banks, but about one-third of the USSR's current debt to the West is owed to Western governments. This means, of course, that if the Soviets were to default, this amount would be paid by the taxpayers of the free world.
While member banks of the U.S. Federal Reserve system are limited by regulatory guidelines to lend no more than 10 percent of their equity to any one customer, there is a way out. Loans from U.S. banks to Soviet-owned banks operating in the West--such as London or Paris--are not counted as loans to the USSR but as loans to England or France.
What is more, that Johnson Act of 1934 made it illegal to extend loans to a government
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