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Global Finance, Feb 1999 by Shepherd, Bill

In a tumultuous year more than a few government actions belong in our 1998 Blooper category-- such as the power struggle between Russia's reformers and its robber barons that snowballed into last August's Russia crisis.

It's too early to judge whether other moves were smart or stupid. Beijing's closing of Guangdong International Trust & Investment Company is an example: Foreign banks are furious that they may lose money on their loans to GITIC, but the tough regulatory action may also help China build a healthy financial system.

High on anybody's list of major developments in 1998 has to be the efforts of 11 European governments to rein in their budgets and bring interest rates into sync in preparation for this year's new single-currency union. But it's impossible to identify any single government act that made the launch of the euro zone work.

Arguably the most important event helping to end the global currency pillaging (at least for a while) was the sudden 20% rise in the yen against the US dollar early in October. A whiplash move of unprecedented proportions, it severely wounded hedge funds and other global speculators, cutting them off from their cheap source of borrowed funds and forcing them to cover their short yen positions. Unfortunately, it can't be included as a government ploy because there's no evidence that either Japanese or US monetary authorities intervened to start the move.

1 Alan Greenspan's interest rate cuts

Aside from the yen's climb, the moves that most settled global finance last autumn were the US Fed's three cuts, of a quarter point each, in base US lending rates. The first cut came September 30, six days after the Fed helped orchestrate the $3.5 billion bailout of Long-Term Capital Management.

The Bundesbank and other European central banks were too intent on preparing for the euro's launch to care about the rest of the world, and the Bank of Japan was too mired in Japan's own mess. Only Alan Greenspan and his Fed colleagues adopted a global view and took action.

Greenspan almost blew it. The first cut, only 25 basis points, was so timid that many people felt the Fed didn't understand the problem. The second cut, 16 days later, caught everyone by surprise and made many wonder if the Fed was panicking. But by the third cut, a month later, the capital markets had settled down-so much so that within a week the US stock market surged to new highs.

Greenspan's said he was insulating the US economy from threats from abroad. But in taking the steps he did, he took on a role no one else would accept-and effectively became central banker to the world.

2 South Korea's debt restructuring and bond issue

South Korea's $4 billion global sovereign bond issue last April worked in tandem with a huge debt restructuring to save the Korean economy. Korea's banks appeared likely to default on $24 billion in short-term loans, all due within several months, from foreign creditors. Prodded by New York Fed chairman William McDonough,America's six top bank chiefs got most of the world's other major banks to agree to a rescheduling.

In the first negotiations, the Seoul government rejected a J.P Morgan plan to auction $25 billion in government bonds to take out the bank debt-because Seoul didn't want to convert private liabilities to government ones and feared that an auction price would be too high. In the second round, Citibank vice chairman William Rhodes, a veteran of the 1980s Latin debt crisis, cut a deal to roll over $24 billion of the Korean banks' debts into government guaranteed loans stretching out three years.

The final stage was the $4 billion offering-$1 billion in five-year bonds and $3 billion of a 10-year tranche. Lead managers Salomon Smith Barney and Goldman Sachs generated an order book of $12 billion for the issue and were able to sell the tranches at 345 and 355 basis points over US treasuries, 45 basis points lower than expected. The issue reopened the international markets for Korean issuers only four months after the onset of Korea's debt crisis-and had the added effect of reducing spreads on other emerging market debt by up to 55 basis points.

3 Brazil's Telebras privatization

Somehow, between spasms of global anxiety about its currency, Brazil managed at the end of July to pull off the largest and most complex privatization-breaking its huge telecom company, Telecomunicacoes Brasileiros (Telebras), into 12 pieces and selling the government's controlling stake in them to strategic buyers for a total of $19 billion, about $7.3 billion more than the government's stated minimum.

Brazilian privatizations are always dramatic. This time, 10-foot fences were erected around the Rio de Janeiro bolsa, and 1,500 police were called in to quell labor union rioters. Biggest winner was Spain's Telefonica de Espana, which shelled out $6.6 billion for Telesp, the fixed-line jewel of the system that serves the state of Sao Paulo, plus two other pieces. Portugal Telecom grabbed Sao Paulo's cellular service for $3.1 billion, and Telecom Italia (with Brazilian partners) won three smaller parts for $2.9 billion. MCI took the long-distance carrier Embratel for $2.3 billion.