Losses in Russian Bond Default Estimated at $33 Billion
Credit Suisse First Boston, George Soros Take Major Hits
Foreign investors in Russian bonds are facing losses exceeding $33bn, according to a conservative estimate, because of the government's effective default.
The losers include George Soros's investment funds, which admitted yesterday they had lost up to $2bn as a result of the Russian economic crisis.
The Russian loss is the largest suffered by Mr Soros's Quantum Group, said Stanley Druckenmiller, chief investment strategist at Soros Fund Management.
Credit Suisse First Boston, the Swiss-owned investment bank, said that Russian elites had "plundered" the country's capital. It said its profits had fallen more than $250m in less than two months because of Russia.
Paul Luke, a senior emerging markets trader at Deutsche Bank in London, said losses on foreign holdings of Russian dollar and rouble-denominated bonds could exceed $33bn. Other estimates have ranged up to $50bn.
About 75 per cent of the paper value on Russia's hard currency bond debt had been wiped out, Mr Luke said. His estimate excludes not only bank lending and equities but also possible losses on rouble hedging contracts between foreign investment banks and Russian banks, most of which would be unable to honour their liabilities.
One senior US banker said the action would not be forgotten. "I don't think anybody's going to lend these guys a dime," he said.
The move also raised serious questions about whether other contracts would be honoured, he said. Mark Mobius, head of emerging market investment at Franklin Templeton, a leading fund manager, said Russia had lost the trust of investors.
Mr Druckenmiller, however, was not critical of the government. "We took a risk and we were wrong," he said. Mr Soros warned in a letter published in the FT two weeks ago that Russia's financial turmoil had reached a "terminal phase".
CSFB yesterday said net profit so far in 1998 had plunged from $754m at June 30, after the first half, to $500m. CSFB, which along with its clients accounted for 40 per cent of foreign ownership of the $40bn Russian government debt market, is believed to have lost at least $350m - and perhaps as much as $500m - in Russia since June.
Andrew Ipkendanz, the bank's head of global emerging markets, said: "Russian elites have plundered the country's capital and funnelled most of the proceeds offshore."
Traders estimated hedge funds would sustain about 25 per cent of the losses. The rest would be borne by foreign investment banks and US funds.
Among investment banks, Goldman Sachs said exposure to Russia was "immaterial". JP Morgan, Bankers Trust, Merrill Lynch, Morgan Stanley Dean Witter and Lehman Brothers all declined to comment. Analysts said any firms with very large losses would probably feel obliged to make statements.
Financial Times, August 27, 1998 |
