Morning Brief – Default by Default?

Default by Default?

I’m advised that before the modern English word default existed in its present form, it held derivations of a Latin word ‘fallere’ meaning to disappoint or deceive in the contexts of modern English (anachronism aside). Hijacked sometime later by the French, the Latin word picked up a quintessential ‘de’ and several permutations of franglicism later, hey presto, the word default is born. Many market participants this morning will be scratching their heads questioning whether Russia truly has defaulted on its debt payments yesterday. However, with thanks to a little Thursday morning etymology, I think we can agree that Russia unequivocally committed our Latin ‘fallere’ but perhaps that does not translate perfectly into today’s default.

So here are the facts. Russia had significant repayments on US denominated debt due yesterday that it seemed increasingly unlikely to be able to service. With the central bank having been sanctioned and as much as 50% of its foreign currency reserves frozen, it’s Dollar liquidity and access to payment networks was thought likely to be insufficient to meet the multimillion Dollar interest payments due of it. A default would block Russia’s access to already iced-over funding markets. So Russia began to float the idea of making interest repayments in its domestic and devastated Ruble. This however was subsequently ruled as a de facto default by ratings agencies whose seal of approval means a huge amount in these markets.

The truth is that many of Russia’s internationally issued hard currency bonds do have a clause in them stating Ruble repayments are a permissible alternative to default when USD interest repayments cannot be made. Unfortunately for Russia, the bonds with interest falling due yesterday were not amongst those securities containing the Ruble caveat. Instead, to preserve any semblance of credit worthiness, Russia provided evidence of a request for USD interest payments totalling $117M. The finance minister confirmed this request was submitted to a US bank.

Due to the sanctions imposed on Russia by US authorities, it is not yet identifiable whether the payment will clear to the relevant bond holders. Therefore, Russia has positioned the US authorities and government between itself and the financial and lending community. As the payment has been made, there is ambiguity over whether Russia has defaulted on its interest obligations. However, it has undeniably committed our Latin ‘fallere’ and cheated, deceived and in doing so disappointed bond holders.

Discussion and Analysis by Charles Porter

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