Russia and LTCM crisis 1998: what happened
Russia and LTCM 1998: from July 17, 1998 to October 9, 1998.
Updated
What happened?
In August 1998 Russia defaulted on its debt and the LTCM fund, with enormous leveraged bets, was left on the brink of collapse. The Fed coordinated its rescue and cut rates. It was a financial scare without a recession. For this analysis, the episode runs from July 17, 1998 to October 9, 1998.
What would Crisis Monitor have shown?
Recalculating the index each week with the data available at the time, it stood at 15 out of 100 when the decline began and peaked at 34.5 in Oct 1998. The index did not reach Alert (35).
This is a reconstruction made after the fact using weekly data: it helps show how the indicators behave, but it does not guarantee that things will happen the same way again.
How did the data move in that crisis?
From one year before to the end of the crisis. The vertical line marks when it began; the dashed red line is the level beyond which the data point becomes a concern.
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Which data points warned first?
2 data points entered the stress zone before the crisis began: stock market fear (VIX), long vs short rates (2 years).
Gold and copper are not part of the index, but they help show fear and activity: see how they moved on the gold and copper pages.
The first time each data point entered the stress zone (score 66 out of 100), searching from 12 months before the start. “Before” = it warned before the crisis began; “after” = it reacted late. Note: after another crisis, some data points were still elevated from the previous one.
| Indicator | How does it usually behave? | When did it first become a concern? | When did it warn? | Moment of peak stress |
|---|---|---|---|---|
| Stock market fear (VIX) | Moves with the crisis | Oct 1997 | 9 months before | 45.29 Sep 1998 |
| Long vs short rates (2 years) | Usually warns early | Jun 1998 | 1 month before | -0.07% Jun 1998 |
| Financial stress (St. Louis) | Moves with the crisis | Sep 1998 | 2 months after | 1.20 Sep 1998 |
| Long vs short rates (3 months) | Usually warns early | Sep 1998 | 2 months after | -0.02% Sep 1998 |
| Ease of borrowing | Usually warns early | Never became a concern | — | -0.03 Oct 1998 |
| Credit of ordinary companies | Usually warns early | Never became a concern | — | 2.65% Oct 1998 |
| Store sales | Moves with the crisis | Never became a concern | — | 0.9% Jul 1997 |
| Dollar strength | Moves with the crisis | Never became a concern | — | 102.24 Jun 1998 |
| Unemployment benefit claims | Usually warns early | Never became a concern | — | 14.1% Jul 1998 |
| Consumer sentiment | Usually warns early | Never became a concern | — | -5.1 pts Oct 1998 |
| Rise in unemployment (Sahm rule) | Moves with the crisis | Never became a concern | — | 0.17 Oct 1998 |
| Recession probability | Moves with the crisis | Never became a concern | — | 0.1% Jul 1997 |
| Factory output | Moves with the crisis | Never became a concern | — | 6.3% Jul 1997 |
| Credit of risky companies | Usually warns early | FRED only publishes the last 3 years of this series (ICE license) | ||
| Copper vs gold | Usually warns early | Did not exist or there was no data in this period | ||
Does the current moment resemble that crisis?
Score from 0 to 100 for each area, today and at different moments of that crisis.
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How does everything look now? See the live dashboard.