The possibility of default loomed larger after the head of the International Monetary Fund, Kristalina Georgieva, admitted that a Russian default is no longer an “unlikely event”. A look at possible consequences of a Russian default:

Rating agencies say Russia is on the brink of default on government bonds after the invasion of Ukraine, with billions of dollars worth of foreigners.
That prospect evokes memories of a 1998 Moscow default that contributed to global financial disruption.

The possibility of default loomed larger after the head of the International Monetary Fund, Kristalina Georgieva, admitted that a Russian default is no longer an “unlikely event”. A look at possible consequences of a Russian default:

Why do people say that Russia is likely to default?
Russia faces a $117 million interest payment on two dollar-denominated bonds on Wednesday.
Western sanctions following the war in Ukraine have severely restricted banks and their financial transactions with Russia, and have also frozen much of the government’s foreign exchange reserves.

Finance Minister Anton Siluanov has said the government has given instructions to pay the coupons in dollars, but added that if banks are unable to do so due to sanctions, the payment would be made in rubles. There is a grace period of 30 days before Russia officially defaults.

So Russia has the money to pay but says it can’t because of sanctions that have restricted banks and frozen many of its foreign exchange reserves.
However, the move also fits in with efforts to limit the outflow of foreign exchange reserves, which have become more scarce as a result of the sanctions.

Rating agencies have downgraded Russia’s credit rating to below investment grade, or “junk.” Fitch said his “C” rating means “a standard or standard-like process has begun.”

What’s in the fine print?
Some Russian bonds allow payment in rubles under certain circumstances. But not these bonds.
And there are indications that the amount of the ruble would be determined by the current exchange rate, which has fallen, leaving investors with much less money.
Fitch said on Wednesday that payment in local currency on the bonds in question “would constitute a sovereign default on the expiration of the 30-day grace period.”

In addition, Russia would also default on payments to foreigners on ruble-denominated bonds due on March 2 after a similar 30-day grace period.
Those payments were made in a state deposit fund, but were not forwarded to foreign investors due to restrictions from the Russian central bank.
“This is a default if it is not remedied within 30 days of the payment due,” the rating agency said.

Even for dollar bonds that allow ruble payments, it can be complicated.
“Rubles aren’t worthless, of course, but they are depreciated quickly,” said Clay Lowery, executive vice president of the International Institute of Finance, the Association of Financial Institutions.

“My guess is it could be a legal issue: Are these extraordinary circumstances or were they caused by the Russian government itself because the Russian government invaded Ukraine? That can be fought in court.”

How do you know if a country is in default?
Rating agencies can lower the rating to default, or a court can decide the matter.

Bondholders who have credit default swaps — derivatives that act as insurance policies against default — can ask a “determination committee” of representatives of financial firms to decide whether a default should lead to a payout, which still isn’t a formal letter of default.
It can be complicated. “A lot of lawyers will be involved,” said Lowery of the IIF.

What would be the impact of a Russian default?
Investment analysts cautiously assume that a default in Russia would not have the kind of impact on global financial markets and institutions as the 1998 default.

At the time, Russia’s default on ruble bonds came on top of a financial crisis in Asia.
The US government had to step in and get banks to bail out Long-Term Capital Management, a major US hedge fund whose collapse was feared could have jeopardized the stability of the wider financial and banking system.

This time, however, “it is difficult to say 100% in advance, because every state default is different and the global effects are only visible once it has happened,” said Daniel Lenz, head of euro interest rate strategy at DK Bank in Frankfurt. . , Germany.

That said, a Russian default would no longer be a big surprise to the market as a whole. … If there were big shock waves, you would already see that. That doesn’t mean there won’t be major problems in smaller sectors.” The impact outside of Russia could be mitigated as foreign investors and companies have reduced or avoided their dealings there since an earlier round of sanctions imposed in 2014 by the US and the European Union in response to Russia’s unrecognized annexation of the Russian Federation. Ukrainian peninsula Crimea.

IMF head Georgieva said that while the war has devastating consequences in terms of human suffering and a broad economic impact in terms of higher energy and food prices, a default in itself would be “absolutely not systemically important” in terms of risks to banks in the neighbourhood. the world.

Holders of the bonds, for example funds that invest in emerging market bonds, could incur serious losses.
Moody’s current rating means creditors would incur losses of 35% to 65% on their investment if there was a default.

What happens if a country defaults?
Often, investors and the defaulting government will negotiate a settlement that will give bondholders new bonds that are worth less, but give them at least partial compensation.

However, it is difficult to see how that could be the case now with the war going on and the Western sanctions blocking many transactions with Russia, its banks and companies.
In some cases, creditors can file a lawsuit. In this case, Russian bonds are believed to contain clauses that allow a majority of creditors to agree to a settlement and then impose that settlement on the rest, thus avoiding lawsuits by minority holding creditors.

Once a country defaults, it can be cut off from bond market lending until it defaults and investors regain confidence in the government’s ability and willingness to pay.

The Russian government can still borrow rubles at home, where it largely depends on Russian banks for its bonds.
Russia is already suffering severe economic consequences from the sanctions, which have plunged the ruble and disrupted trade and financial ties with the rest of the world.

The default would thus be another symptom of Moscow’s wider political and financial isolation as a result of the invasion of Ukraine.

This post What would a Russian bond default mean? explained

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