The List: The World’s Biggest Bailouts

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Posted September 2008  

Lehman Brothers is no more. But before letting it fail, the United States rescued Bear Stearns and saved Fannie and Freddie. So what are the biggest bailouts of all time? In this List, FP looks at five of the biggest—and whether they were worth the cost.

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The U.S. Savings and Loan Crisis

Bailout date: August 1989

Amount: Estimates vary widely, but $200 billion (in 2008 dollars) is a reasonable figure.

What happened: The “S&L” debacle of the late ’80s and early ’90s was long in the making and long in the unwinding. U.S. taxpayers were first put on the hook when then President George H.W. Bush (right) signed the Financial Institutions Reform, Recovery and Enforcement Act of 1989, which radically reformed the savings and loan industry and federal regulations. When the dust finally settled in 1995, more than 1,000 small lending institutions known as “savings and loans,” also called “thrifts,” had failed. Half of the federally insured thrift institutions in the United States had gone under in less than a decade, and the associated slowdown in new home construction and the financial fallout contributed to the 1990-1991 recession. The underlying causes of the S&L crisis are complex and disputed, but most scholars generally agree that high, volatile interest rates, reckless lending practices, rapid deregulation, and lax oversight paved the way for the greatest banking disaster since the Great Depression.

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South Korea

Bailout date: December 1997

Amount: $78 billion (in 2008 dollars)

What happened: Two words: Asian crisis. Beset by a collapsing currency and bankruptcies galore, South Korea turned to the International Monetary Fund (IMF) for help, and the World Bank, the United States, Japan, and 11 other countries pitched in funds as well. In exchange, the Korean government had to stomach tough conditions, including higher interest rates and reforms intended to open the country’s closed economy and crack down on cozy relationships between banks and large, opaque conglomerates called chaebols. The economic crisis brought to power opposition leader Kim Dae Jung (left), a reformer credited by many for pulling South Korea back from the brink of disaster. Today, South Korea’s economy faces challenges of a different sort—principally rising inflation and an aging population—though The Economist forecasts 4.2 percent growth for 2009.

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Indonesia

Bailout date: January 1998 – April 1999

Cost: between $58 billion and $64.7 billion (in 2008 dollars)

What happened: Rocked by the Asian financial crisis of the late 1990s, Indonesia was home to one of the IMF’s biggest bailouts. The country’s rupiah currency had been dropping steadily since August 1997, with inflation soaring to nearly 80 percent. On top of the ensuing capital flight, protests and political turmoil paralyzed the capital of Jakarta under President Suharto (shown at right with then IMF Managing Director Michel Camdessus), in power since 1968. At first, the IMF money was contingent on Suharto’s ending his penchant for cronyism, but that stipulation was dropped shortly after the president defiantly named family members and associates to his government. After the bailout, Indonesia’s economic woes continued for several years and resentment grew toward the IMF policies of the 1990s, which some felt compromised the country’s economic sovereignty. Macroeconomic conditions eventually improved, aided by the resolution of the East Timor crisis. Ironically, the 2004 tsunami also helped, bringing the country close to settling a dispute in the separatist Aceh region. In 2006 and 2007, the U.S. CIA called the country’s stock market one of the three best performers in the world.

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Brazil

Bailout dates: November 1998, August 2001, and August 2002

Cost: $56.7 billion, $16.3 billion, and $36.7 billion (respectively, in 2008 dollars)

What happened: Brazil’s first bailout in 1998 came on the heels of financial crises in Asia and Russia that had prompted panic among investors in Latin America. This time, the IMF and a host of other lenders vowed to head off the crisis before it struck. Brazil, South America’s largest economy, was offered a healthy package of aid to stabilize the region. In return, Brazil was asked to cut spending and raise taxes to prevent a budget shortfall. Brazil’s legislature rejected the conditions, but the loans went forward anyway. Lenders intervened again in the name of stability in 2001, as Brazil’s currency, the real, had devalued 20 percent between January and August and public debt was growing. Elections in 2002 raised yet more concerns as investors were unsure how leftist candidate Luiz Inácio Lula da Silva (above) would handle the crisis. Brazil’s stock market fell further when then U.S. Treasury Secretary Paul O’Neill demanded proof that another loan would not “go out of the country to Swiss bank accounts.” Furious, Brazil demanded an apology, and soon thereafter, the United States and the IMF offered the country a $30 billion package.

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Argentina

Bailout dates: December 2000 and August 2001

Cost: $50.7 billion and $1.5 billion (respectively, in 2008 dollars)

What happened: Just two years after a dramatic recession that left unemployment at about 16 percent, Argentina’s bailout came at a moment of severe crisis. A projected $6.5 billion budget shortfall in 2001 coincided with another $15 billion due to creditors that year. With Argentine markets tumbling, the government rushed to secure assistance from the IMF, the World Bank, and other lenders. Loans were extended again in 2001, and this time, lenders asked Argentina to slash pensions and government spending while raising taxes. The austere strategy provoked tens of thousands of angry protesters to hit the streets repeatedly. Despite the loans, the economic crisis was far from averted and the country defaulted on $81 billion in bonds in December 2001. Banks and the Argentine peso collapsed, and many middle-class Argentines fled abroad, their savings wiped out. In 2003, the IMF and Argentina agreed that the heavily indebted country would be asked to repay only the interest on its debt, and in March 2005, bondholders swallowed a restructuring of the defaulted debt. Argentina paid off a final $9.5 billion owed to the IMF in 2006, and on Sept. 2, President Cristina Fernández de Kirchner promised to repay another $6.7 billion to the Paris Club of international creditors.

Note: One should be careful comparing bailouts of financial systems or national economies with those of individual firms such as Fannie Mae and Freddie Mac. Additionally, one could also list such bailouts relative to the size of the economy in question, in which case smaller countries such as the Dominican Republic would rank much higher.