[London, 9th Archyde.com]-Russia has recently taken steps to repay dollar-denominated government bonds issued in the international market in ruble for the first time, which could lead to the first default (default) on foreign sovereign debt. ..
Rating agency S & P downgraded Russia’s foreign currency-denominated government bond rating to “SD (selective default)” on the 9th, saying that Russia is at increased risk of failing to or will not meet its obligations to repay foreign creditors.
Russia has not defaulted on external debt since the Russian Revolution of 1917. Russia’s government bond ratings were investment-qualified until February 24, when the country invaded Ukraine, and defaults were unimaginable until recently.
I have summarized the main points about the possibility of Russia’s default.
◎ Can Russia repay?
Russia has reached a $ 649 million repayment deadline for two types of sovereign debt on the 4th. But the US Treasury has prevented Russia from paying back using frozen foreign exchange reserves.
As an alternative, Russia has taken steps to transfer repayment funds to creditors in so-called unfriendly countries to a special account of the Japan Securities Depository Center, Inc. (NSD) in rubles.
There is a 30-day grace period for sovereign debt principal and interest payments that are due on the 4th.
According to analysts, Russia has both the means and the ability to repay. Energy exports generate billions of dollars in revenue, and while about half of foreign exchange reserves are frozen, there are hundreds of millions of dollars left in unfrozen foreign exchange reserves.
According to Elina Rivakova, Deputy Chief Economist at the Institute of International Finance (IIF), this could be considered a “state of willingness to pay (WTP).”
The US Treasury does not prohibit the US bank from becoming a “correspondent bank” on behalf of Russian payments. Until May 25, approval was granted to pay for the repayment of Russian sovereign debt.
Taken together, it seems that Russia can still repay if it has the will.
◎ Default type
Default is a breach of contract at the most basic level, but the term can include a wide range of scenarios.
According to a paper by a debt restructuring expert at the International Monetary Fund (IMF), repayment default means not paying principal, interest payments or other debt after the grace period.
However, there are also technical defaults that occur due to administrative mistakes, etc., which are generally not emphasized by market participants and can be quickly repaired.
Repayment in the wrong currency, in this case the ruble, is a default, legal experts point out.
Russia denies this notion of default. “It is possible to create a theoretical default state, but it is a purely artificial state,” Peskov said on the 6th. “There is no evidence that it actually became the default.”
◎ Who certifies as default
The default is “state”, not the rating, but the market often focuses on default certification by rating agencies.
S & P, which has identified Russia as a “selective default,” said it could convert the rubles received by investors into dollars within a 30-day grace period, or the Russian government would not.
It is not clear how defaults will be announced, as major rating agencies have suspended Russian ratings across the board.
By default, the impact is widespread.
For example, a credit default swap (CDS), which is an investor’s “insurance” in preparation for default, may be triggered. In this case, the “decision committee” decides whether it corresponds to a “default” event, but the decision is generally made after the grace period has expired.
The balance of CDS contracts regarding Russia is around $ 6 billion.
◎ Possibility of Moratorium Declaration
Russia may unilaterally declare a moratorium, a temporary or permanent suspension of repayment.
According to the IMF, the moratorium will be announced separately from default or put into practice in the form of legislation. That is, the timing of the declaration can be either before or after the default.
As Mexico did in 1982, it could declare a moratorium as a temporary suspension of repayment until the government embarks on debt restructuring.
The Moratorium Declaration can also trigger the activation of CDS.
◎ After default
Debts that are at risk of default or have already defaulted are often bought by funds specializing in “distressed bonds”. The purpose is to make a profit in the event of debt restructuring, or to bring it into a court battle to get compensation or seize assets.
However, court battles and asset seizure procedures take a long time and are costly. In the past, there are many cases of failure.