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America's ... I mean... Russia's default risk tops Iceland's as financial crisis deepens



October 27, 2008 – Comments (5)

Want to try something interesting? Read this article by Evans-Pritchard, and substitute the U.S. every time he mentions Russia... and substitute the horrific numbers with ones many times larger. If you really analyze with an open mind why the S&P saw fit to downgrade Russia's economy while ignoring the fact that their every concern applies in the U.S. as well... you may start to apporeciate the gravity of the situation for the U.S. economy. S&P has already demonstrated its complete worthlessness in failing to ascertain the risks of more than $1 quadrillion in derivative instruments around the world, so we have no reason to trust either their competency nor their impartiality going forward. The ratings agencies were key players in the present crisis, and the AAA rating of U.S. bonds given recent outlays and our deepening deficit is a joke.

Russian default risk tops Iceland as crisis deepens Russia's financial crisis is escalating with lightning speed as foreigners pull funds from the country and the debt markets start to price a serious risk of sovereign default.

Russia's financial crisis is escalating with lightning speed as foreigners pull funds from the country and the debt markets start to price a serious risk of sovereign default.

The cost of insuring Russian bonds against bankruptcy rocketed to extreme levels yesterday. Spreads on credit default swaps (CDS) reached 1,123, higher than Iceland's debt before it sought a rescue from the International Monetary Fund.

Moves by Hungary, Ukraine and Belarus to seek emergency loans from the IMF have now set off a dangerous chain reaction across Eastern Europe.

Romania had to raise overnight interest rates to 900pc on Wednesday to stem capital flight, recalling the wild episodes of Europe's ERM crisis in 1992. The CDS spreads on Ukraine's debt have topped 2,800, signalling total revulsion by investors.

Rating agency Standard & Poor's issued a downgrade alert on Russian bonds yesterday, warning that a series of state rescue packages worth $200bn (£124bn) could start to erode the credit-worthiness of the state.

S&P said Russia's budget was likely to slip into deficit in 2009 as result of the dramatic slide in oil and metal prices this autumn, and cautioned that "the ongoing concentration of the financial system in state hands" had become a political risk.

Russian companies must roll over $47bn of foreign loans over the next two months, and a further $150bn or so next year, a task that has become close to impossible as investors flee Eastern Europe.

President Dmitry Medvedev said yesterday that disaster could still be kept at bay. "We can avoid a banking, forex or debt crisis and get through today's difficulties. Russia has not yet got in this difficult situation. It must avoid this," he said.

Hans Redeker, currency chief at BNP Paribas, said markets no longer believe Russia is strong enough to guarantee the estimated $530bn of foreign debts accumulated by its companies during the break-neck expansion of the oil boom. "The surge in Russian CDS spreads is paralysing the whole system. The government can offer very little help to the banks at this point because its own sovereign debt is in question," he said.

"This crisis is starting to look like the Black Wednesady in 1992. Unless we see an extension of central bank swaps in dollars and euros to Eastern Europe within days to stop this uncontrolled process of deleveraging, this could get out of control and do serious damage to Western Europe. We could see the euro fall to parity against the dollar by next year," he said.

Kingsmill Bond, chief strategist at Russian investment bank Troika Dialog, said Russia's Achilles Heel is the lack of a proper rouble bond market. This had forced companies to raise half their money abroad, in foreign currencies.

"The consequence is that foreign debt repayment has had a dramatic impact. It has led to a scramble for assets and forced selling of good assets in order to raise cash to pay debt. The only way for oligarchs to raise money at present is by selling their equity," he said. Russia's "unique fragility" is that over $1 trillion of debt needs to financed from a domestic capital pool of $600bn.

Even so, Mr Bond said Russia is still sitting on over $500bn of foreign reserves – the world's third biggest – despite losses of $67bn since August from capital flight. "The government still has enormous firepower to solve the problem," he said.

5 Comments – Post Your Own

#1) On October 27, 2008 at 7:03 PM, outoffocus (22.86) wrote:

I've been asking this question ever since I looked at the US Government's financial statements 3 years ago. How on EARTH does the US Government still have a AAA rating on its treasury debt? Unless the Government gets rid of roughly HALF of ALL its spending, I dont see how it can feasibly pay off its debt. And yet its continuing to increase its debt as if there are no consequences.  I think we've seen CLEARLY this year that there are tangible consequences of too much debt. That is what scares me the most about these bailouts, not just the fact that the US is bailing out companies that should be allowed to go out of business, but that the US is bailing out companies with money it does not have.  And what happens when the US finally defaults on its sovereign debt? I'll tell you what happens, Bye Bye Social Security and Medicare.  So all  you baby boomers who thought you were going to still get your social security payments while the rest of us generations get screwed, I got news for you...

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#2) On October 27, 2008 at 7:10 PM, starbucks4ever (78.92) wrote:

"How on EARTH does the US Government still have a AAA rating on its treasury debt?"

Because when people from Moody's begin to examine the numbers, they get a phone call from people upstairs, reminding them not to forget whom they're ultimately working for :):):) 

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#3) On October 27, 2008 at 8:02 PM, StockSpreadsheet (67.93) wrote:


You should also point out that Russia has the third largest foreign reserves while the U.S. is by far the world's largest debtor.  Russia has money to help pay its debts.  The U.S. only has promises.  That could make a difference.

On the other hand, since most foreign reserves are in dollars, if the dollar collapses, very few other nations will have any foreign reserves at all, so our problem would quickly become their problem also, at least until they were able to swap our collapsed dollars for something more tangible that we produce, (corn, soybeans, coal, airplanes, etc.).  


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#4) On October 27, 2008 at 8:14 PM, starbucks4ever (78.92) wrote:

At least Russia doesn't have to worry about the direction of the dollar. 500 billion of  dollar reserves and 500 billion of corporate debt cancel each other out in either case.

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#5) On October 29, 2008 at 8:51 AM, binv271828 (< 20) wrote:

Great post. Yeah, Forex investors are running back into "safe" t-bills now. And with a massive dollar short covering rallies, the USD has been on a (ulitmately unsustainable) tear. But how much longer will t-bonds be considered safe, with news like this and the now outright dissatisfaction (very unusual) from China?

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