As bankers pack off for the August break to their summer playgrounds, their Caribbean beach-side or Tuscan villas, or to their yachts, many will reflect uneasily on a tumultuous 12 months in global financial markets. This time a year ago, few could have guessed what a tornado was about to engulf them. News of the political and economic crisis in Russia filtered across the sunblock-scented airwaves in August. Within weeks, a huge speculative bubble in emerging-market debt that had built up in the first half of 1998 suddenly burst. Investors, traders and banks scrambled for margin and liquidity, spreads on all but the safest government bonds blew out as financial markets deleveraged, stocks tumbled and the dollar had its biggest ever one-day fall against the yen. The Federal Reserve found itself brokering the bail-out of an obscure hedge fund, which, had it collapsed, might have plunged the markets into catastrophe.
Investment banks were thrown into turmoil. Staff at Lehman Brothers had to listen to a daytime TV financial news reporter pronounce that their firm had gone bankrupt.
Twelve months on, the world certainly looks and feels like a safer place. The Federal Reserve has been, as ever, a deft operator, cutting interest rates just enough to reassure markets last year, and raising them modestly this, to head off excessive exuberance.