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Russian bonds tumble as new sanctions trigger default fears

Russian bonds plummeted on Monday as investors struggled with the possibility that the latest round of Western sanctions on Russia could push Moscow into a mandatory default for the first time since 1998.

US and European moves over the weekend to cut off Russia from the global financial system, as Moscow stepped up its invasion of Ukraine, raised concerns that foreign holders of Russian debt would not be able to receive interest or principal payments.

Sanctions against the Russian central bank are likely to seriously hurt its attempts to deploy more than $ 600 billion in foreign reserves to bolster its finances, leaving markets considering the possibility that a country with a debt of just 20% of gross domestic product could fail. Return to lenders.

Russian President Vladimir Putin on Monday afternoon Aroused fears Government failure to declare a ban on all Russian residents transferring foreign currency abroad, including serving debts abroad.

“Russian default is now a real option,” said Tim Ash, an economist at BlueBay Asset Management. “It’s absolutely amazing how the mighty fell.”

Russia’s dollar-denominated bonds fell on Monday, with its largest – a $ 7 billion bond slashing in 2047 – falling by half to 33 cents on the dollar, a level linked to high levels of distress, according to Tradeweb.

The moves came after S&P Global downgraded Russia’s credit rating to “junk” status at the end of Friday.

The cost of purchasing insurance derivatives against Russian debt default has soared. The price of Russian default exchanges, which offer holders a payment like insurance if the state fails, rose sharply, with the five-year CDS soaring by 20 percentage points to 37% on a “advance” basis, according to derivatives traders. Street market.

CDS becomes a quote on a “preview” basis as fears of economic distress increase. This is because the cost of purchasing the default protection far exceeds the standard ongoing cost defined in the derivatives contracts, so traders start quoting the extra payment they require at the beginning of the transaction.

Trading levels on Monday say it will cost $ 37 million to secure a $ 100 million debt against default for five years, in addition to $ 1 million a year in premiums.

Russian default will be painful for overseas investors, who are already deterred by falling bond prices. At the beginning of the year, foreigners held a debt of $ 20 billion in foreign currency, as well as domestic debt worth more than 3 billion rubles.

Some investors warned against over-reading bond prices in light of the most tense trading conditions on Monday. “I think current pricing may be suppressed by forced liquidation, and does not properly reflect the default probabilities,” said one fund manager.

Russia may even prefer to refuse to repay its debt to keep expensive dollars, given the sanctions on the central bank, said one of the emerging market fund managers. However, he added that Monday’s price declines were due to some holders being forced to sell their bonds and “do not properly reflect the default probabilities”.

While the Russian state had a strong balance sheet before its invasion of Ukraine, traders and investors increasingly feared that sanctions and other measures might prevent it from making interest payments to international investors. These technical factors can still result in payment on CDS contracts.

There are also growing concerns that these factors could interfere with the process used to determine payments on CDS contracts, as it requires traders to put Russian bonds up for auction.

“The risk in our view may arise in a scenario where current restrictions may extend to include a total ban on secondary trading,” Citigroup credit analysts wrote in a letter to customers on Friday.

Ray Attril, a strategist at the National Bank of Australia, warned that Russian sovereign default would also resonate in the European banking system, estimating that banks in France and Italy each hold about $ 25 billion in Russian government bonds, and Austrian banks held about $ 17.5 billion in exposure.

“Default will have macroeconomic significance,” he said. “This will have significant implications for the bank’s balance sheets and lending capacity – as we saw recently after the 2011-2012 Greek debt crisis and the reorganization.”

Russian bonds tumble as new sanctions trigger default fears Source link Russian bonds tumble as new sanctions trigger default fears

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