Default risk is rising

Written by The Frontier Post

Valery Mikhailov

At the beginning of this week, the fall in quotations of sovereign Eurobonds accelerated: it affected papers issued by European states, and even more so by Russian ones, while Ukrainian ones collapsed so deeply and rapidly that Reuters called it a crash .
There are plenty of reasons for excitement and pessimism among investors and financial speculators: there is an avalanche-like strain of the coronavirus “omicron” attacking the whole world, and the Fed ‘s promises regarding further tightening of monetary policy, and the ongoing tension in relations between Russia and the West. Tension, which for the most part is being whipped up precisely in the West, replacing it, however, with the alleged intentions of Moscow that are about to commit “aggressive aggression” against Ukraine . However, the statements of our officials this time are also not distinguished by excessive pacifism and peacefulness. It is in this connection that Russian, but especially Ukrainian, bonds collapse more than others.
The matter, of course, is not limited to sovereign bonds. For example, during trading on Thursday and Friday last week, the domestic stock market sank by $40 billion. First of all, the banks were “hit”, since the intentions of the West to impose the most severe sanctions against them instead of disconnecting from SWIFT in the event of a further aggravation of the confrontation were announced. Shares of ” Sberbank ” fell by 10.7 percent, VTB by almost ten percent. The decline continued into the beginning of this week. Yesterday, January 18, Russian stock exchanges even showed a record drop. A variety of companies suffered, including oil and gas production, metallurgy, and so on.
As for government debt, federal loan bonds (OFZ) fell by about two percent last week. OFZ rates have exceeded nine percent per annum, which has not happened since August 2016.
At the beginning of this week, OFZ rates reached nine and a half percent. Plus, Russia’s sovereign dollar eurobonds also went down.
For example, Eurobonds maturing in 2047 fell to June 2019 lows. The yield jumped from 3.3 percent at the start of the year to nearly 4.5 percent since December.
Everything that happens is also reflected in the ruble exchange rate, which has dipped against the dollar since the beginning of the year from 74 rubles to 76.5 and even “walked” by 76.8.
Still, these losses can hardly be called dramatic. Let’s say that the ruble against the dollar last January was at about the same level, and then in March-April it was quoted even lower. The fall in stock prices, especially given the scale of profits received in 2021 by many exporters, in particular metallurgists, oil and gas production, and the current state of world markets, is unlikely to be long-term, unless the situation worsens completely.
As for the public debt, everything is generally uncritical with it. Yes, non-residents are withdrawing from Russian Eurobonds, this increases their yield, and hence the cost of new possible external borrowings. But at the same time, foreign investors, according to the Central Bank, own Eurobonds worth only about $20.5 billion. And the entire external debt of $59 billion against the backdrop of a GDP of $1.7-1.72 trillion looks very modest. Not to mention the fact that the very need for attracting external loans by the state in the current circumstances is doubtful. Domestic debt is large (in dollar terms, about 220 billion), but less than a fifth of it belongs to non-residents.
Ukraine is a completely different story. And the point here is not only that the thin one will die while the fat one dries.
Firstly, nevertheless, it was she who, partly for objective reasons, and partly thanks to Western propaganda, found herself at the very center of the confrontation between the West and Russia. Secondly, Ukraine is constantly experiencing an economic crisis, which has been exacerbated by energy and political crises, which Zelensky and Co. provoked themselves. Having tried to increase their rating on an attempt to persecute Petro Poroshenko, they could only arrange a clowningand thereby put themselves in a puddle.
Thirdly, the Ukrainian state is much more dependent on borrowing in general and foreign loans in particular. The state external debt is almost equal in size to the Russian one, and taking into account the part of the domestic debt denominated in foreign currency, it even exceeds it. At the same time, the Ukrainian economy is nine times smaller.
The rates at which Kiev attracts external borrowings have been two to three times higher than Russian ones in recent years. The same week they jumped on “short” securities to an absolute record of 26.5% per annum in dollars.
The yield of Eurobonds with longer maturities soared to 13-16 percent. Default risk is rising. Credit default swaps for Ukraine (the cost of insurance against default) have increased many times over, overtaken the Turkish ones (despite the specificity of the situation in the Turkish economy) and are flying to levels of six to seven percent. In fact, all this means that no one is going to lend money to Kiev on commercial terms in principle.
And if the Russian Ministry of Finance can afford to refuse to place OFZ due to market volatility (that is, due to the growth of rates on ruble OFZ to nine – nine and a half percent), then their Ukrainian colleagues, who, even before all this mess, happily borrowed in hryvnias at 12-13 percent, they are unlikely to be able to do this. They will be forced to increase the yield of domestic bonds, but even this will not necessarily result in their successful placement.
Non-residents from the Ukrainian market of internal borrowings are gradually creeping away, there are simply no other people who want to borrow. And the constant budget deficit has to be covered somehow.
Shares of Ukrainian companies, of course, also went down; what saves us from the feeling of complete collapse is, in fact, the absence of a stock market in the country.
The hryvnia exchange rate also went down: since the beginning of the year, the dollar has risen in price from 27.3 to 28.5 hryvnia, although the National Bank, trying to slow down the process, has sold more than 700 million dollars from its meager reserves since the beginning of the year. Moreover, the main growth of the dollar rate also occurred in recent days.
In a word, the West’s whipping up of hysteria about Russia’s attack on Ukraine is very costly for the latter. And continuation in the same vein may eventually lead it to default, and the Ukrainian economy to disaster. And this will be done without a single shot from Russia, by the hands of the curators of the current Ukraine project themselves. Although, perhaps we are dealing with a joint coercion of Kiev to comply with the Minsk agreements?

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