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Chapter 546: All in the Making

While discussions about Russian economic data were taking place in the conference room of Ernst Asset Management, a layer of invisible heaviness was shrouded in the heart of Wall Street in Lower Manhattan, not far away.

Inside the top-floor conference room of Goldman Sachs headquarters, the Carrara marble floor gleams like a mirror, reflecting countless cold, sharp spots of light from the crystal chandelier hanging from the ceiling, as if foreshadowing the hidden conflicts of interest and lurking risks behind this meeting.

The oval-shaped mahogany round table is reserved for influential figures in the global financial sector: key officials from the five major Wall Street investment banks, the U.S. Treasury and Federal Reserve, and representatives from the International Monetary Fund.

In front of each person was a neatly arranged copy of the "In-Depth Assessment of the Russian Debt Crisis" report, its pages filled with densely packed data tables and analytical charts, documenting how this large Eastern European country was sliding into an economic abyss.

Everyone's expression was unusually solemn, their brows furrowed, and their eyes revealing an undisguised anxiety and caution.

IMF President Michel Condessault sat at one side of a round table, holding an exquisite silver spoon and slowly stirring the coffee in his cup.

After a long pause, he finally put down his coffee spoon, breaking the silence in the conference room.

"The situation in Russia is worse than we anticipated." He pushed up his gold-rimmed glasses, the gold frames studded with diamonds, making them particularly dazzling.

I heard that one of his hobbies is collecting eyeglasses, and besides eyeglasses, walking sticks are also one of his collections.

"Tax revenue in October was only 112 billion rubles. Given the current downward trend in fiscal revenue, it is very likely that tax revenue in November will fall below 10 billion rubles. According to our calculations, even if the Russian government cuts spending, it will still need at least 20 billion rubles in fiscal expenditure each month to maintain the normal operation of government agencies and the basic supply of public services."

"What's even more serious is that their foreign exchange reserves are only $118 billion, which is far from enough to cover their debt repayment needs for the next three months." The data disclosed by Michelle Condsue is more detailed and accurate than the information held by Ernst Asset Management.

However, no matter how detailed the data is, it cannot change the core fact that Russia's fiscal and debt system is on the verge of collapse.

U.S. Treasury Deputy Secretary Lawrence Summers slammed his fist on the table. "This debt structure is a time bomb, and it's reached the tipping point. Their K bonds have yielded over 100%; it's a Ponzi scheme."

K-bonds are an abbreviation for Russian short-term government bonds. They are short-term, zero-coupon government bonds issued by the Russian Ministry of Finance in 1993 to address the severe fiscal deficit following the collapse of the Soviet Union.

Although it is zero interest, investors buy at a price lower than the face value, and will be redeemed at the face value upon maturity. The difference is the profit.

However, since 1995, the revenue from issuing new bonds has been insufficient to repay maturing bonds. To solve this problem, the only solutions were to increase the yield and allow foreign buyers to purchase them.

At its peak, the yield on K bonds soared to over 200%, and the extremely high yield still attracted a large number of domestic and foreign speculators.

But as Lawrence said, it's a Ponzi scheme—borrowing new money to repay old debts without the ability to pay. This scam will be exposed sooner or later.

Michel Kandessou shook his head. "We can't lend any more money. The previous loans, once they were deposited, were either smuggled out of Russia or used to fill debt gaps. This money didn't enter the real economy at all."

He tapped the documents on the table with his finger. "The fiscal austerity plan proposed by the Kiriyenko government is simply unrealistic; it's a pipe dream. Cutting subsidies will trigger social unrest, and raising tax rates will further damage the already fragile economy. It's a vicious cycle."

At this point, Henry Paulson, the host, spoke up: "But we have no other choice."

"If the Russian government ultimately defaults on its debt, the resulting chain reaction will be catastrophic." "Emerging markets will be directly impacted. Emerging economies that rely on international capital, such as Brazil, India, and Mexico, will face the risks of capital outflows, currency devaluation, and stock market crashes, and may even trigger a new round of emerging market financial crises."

"The rise in risk aversion will lead to sharp fluctuations in global stock, bond, and currency markets. The aftershocks of the Asian financial crisis have not yet completely subsided, and the economies of countries such as Thailand, South Korea, and Indonesia have just begun to recover. If the global financial markets suffer another major shock at this time, it could very likely lead to a resurgence of the financial crisis."

Henry Paulson paused, then turned his gaze to officials from the U.S. Treasury and the Federal Reserve. "The U.S. economy will not be immune either. Russia is a major global energy exporter and raw material supplier, and its economic collapse will lead to sharp fluctuations in international energy and commodity prices."

"A global economic recession will also severely impact U.S. export trade and drag down U.S. economic growth."

Lawrence Summers picked up where Henry Paulson left off, saying, "The Federal Reserve is ready to inject liquidity into the market, but we need the IMF to take action first, providing Russia with a new round of emergency loans to help Russia temporarily stabilize its debt situation and buy the Federal Reserve and Wall Street valuable preparation time."

Michelle Condsous's gaze slowly swept over everyone present, and she found that everyone's eyes were focused on her, filled with expectation, and even with a hint of subtle pressure.

His face instantly turned cold, and he couldn't help but curse inwardly: they said they were discussing countermeasures, but in reality they were pushing all the responsibility onto the IMF.

Does America really have no money?

The answer is obviously no.

Just look at the Nasdaq market right now; there's so much money it's practically overflowing.

But Wall Street giants clearly don't want to use their own funds to bail out the market, even if such a bailout would allow them to make a fortune during this crisis.

It's not that they don't want to bail out the market, but rather that they don't want to use their own funds to do so. The entire Nasdaq is in a frenzy right now, and Wall Street is unlikely to withdraw Nasdaq funds to buy up assets in emerging markets.

They will buy at the bottom, but they need funds from the Federal Reserve, and the Federal Reserve takes time to print money.

These people's plan is simple: the IMF will use its money to help Russia stall, and once the Federal Reserve's funds are in hand, the Russian debt crisis can be triggered however they want. Then they can use the Federal Reserve's funds to buy up cheap assets in emerging markets.

Michel Condessault frowned; he knew he couldn't refuse.

If he responds strongly, it will be questionable whether he can keep his position.

"We can provide another loan, but with stricter conditions: they must mortgage state-owned assets to accelerate the privatization process, while strictly controlling capital flows." He paused, then added, "Moreover, the loan must be disbursed in stages, with the next loan only disbursed after each target is achieved."

Sandy Weir, who attended the meeting with Citigroup, directly voiced his opposition: "Capital controls will scare away all investors. This is tantamount to strangling Russia's financial market. If the financial market collapses, the bond market will collapse as well."

"Besides, most of their state-owned assets are inefficient factories that are practically worthless."

"That's better than nothing." Michel Kandessou was looking for a way out. Even if the debt couldn't be recovered, as long as he had the excuse of asset collateral and terms restrictions, it would show that he had truly fulfilled the World Bank's responsibilities and was saving the Russian economy.

The meeting room was abuzz with discussion. Michelle Kantsu stood her ground, but time was of the essence, and in the end, Wall Street and the Federal Reserve had no choice but to compromise.

Lawrence made the final decision: "Then let's go with Michel's plan, but I hope to inform the Russian Ministry of Finance as soon as possible and reach an agreement quickly."