Extreme Market Dislocation: The 1998 Russian Default & LTCM Crisis

 
On August 17th, 1998 Russia declared a moratorium on its debt, setting in motion a subsequent chain of global financial market dislocations. At one point in August 1998, the Russian stock market was down 84% from the value at beginning of the year.

The collapse of Russian financial markets in turn caused a global liquidity seizure and broad market crisis highlighted by: sudden demand for cash liquidity, flight to quality in fixed income and government bond markets, panic selling and panic ‘rallies’ in global equity markets, dramatic (spot and forward) price and volatility movements in global currency markets, the broad unwinding of strategies that had previously been assumed to be low risk, and the correlation of global market segments that were previously thought to be non-correlated.

The collapse of the Russian markets was also the precipitous event that in turn set in motion the collapse, and then the bailout, of the global macro hedge fund Long Term Capital Management (LTCM). LTCM was a hedge fund with highly leveraged positions in markets that numbered into billions of dollars, and positions that were based on convergence and correlation models that ultimately did not work when markets became ‘dislocated’. The turmoil in financial markets began in August of 1998 and continued for many months thereafter.