A potential default would cost investors billions and shut the country out of most funding markets.
Russia’s economy is fraying, its currency has collapsed, and its debt is junk. Next up is a potential default that could cost investors billions and shut the country out of most funding markets.
Signs of looming financial damage are becoming apparent at many of the world’s biggest money managers, including BlackRock and Pacific Investment Management. But it’s not likely to be limited to these giant funds. Because much of Russia’s debt was rated investment grade just weeks ago, the securities were pervasive across global fixed-income portfolios and benchmarks, meaning the impact could ripple across pension funds, endowments and foundations.
In addition to bonds crumbling to distressed levels, the conflict has left its mark on multiple markets. The rouble has plunged about 35 per cent against the US dollar this year, and local stock trading has been shut for two weeks.Russia’s late-1990s default was on domestic debt, so a foreign currency default would be the first since the aftermath of the 1917 Revolution, when the Bolsheviks refused to recognise the czar’s debts.
Amherst Pierpont fixed income strategist Siobhan Morden said Russia’s dramatic, and sudden, plunge from investment grade to a financial no-go area would worsen losses for debt holders.Ms Morden said: “When a default is a slow train wreck due to policy mismanagement, you can reduce the economic impact and contain losses by gradually selling assets. What makes this unique is this is a very sudden shock that catches everyone off guard.
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