Russian default on Soviet debt now seen
inevitable
12:59 p.m. Dec 21, 1998 Eastern
By Mike Dolan
LONDON, Dec 21 (Reuters) - Russia on Monday
acknowledged it was likely to default on its Soviet-era
dollar debts, prompting bankers to warn this latest
breach of its debt obligations would further fray
relations with its foreign creditors.
Already in protracted and unsuccessful talks with
foreign banks over defaulted domestic rouble debt,
Russia now looks to have failed to convince a legally
sufficient number of holders of rescheduled Soviet-era
debt to accept restructuring terms.
Although government officials insisted they would
continue to honour debt issued since the breakdown
of the old Soviet Union in 1992 -- most of it in the
form of Eurobonds -- analysts said it was hard to
escape the fact that all Russian debt servicing was
now at risk.
''As far as we can see there's no way out of default
on this one,'' said one banker at a U.S. bank.
Deutsche Bank (DBKG.F), which chairs Russia's
London Club declined to comment on Monday.
Russia reached agreement last year with the London
Club -- a loose alliance of commercial bank creditors
-- on rescheduling some $32.3 billion of the
Soviet-era debt, which was restructured into new
instruments known as principal notes (PRINs) and
interest arrears notes (IANs).
Holders of these securities now comprise thousands
of investors including banks, bond funds and private
retail investors. Achieving agreement between such a
diverse group of creditors has become something of a
nightmare.
Deputy Finance Minister Mikhail Kasyanov told a
news conference on Monday that only 72 percent of
PRINs holders had accepted Russia's plan to
restructure interest payments payable on the paper on
December 2, compared with the 95 percent needed.
Under the terms of last year's London Club deal,
Russia has to secure the agreement of at least 95
percent of creditors to alter the payments structure in
such a way.
Russia asked the London Club last momth to poll
some 800 holders of PRINs on whether they would
accept new IANs to cover a $360 million cash
payment.
The deadline for such an agreement is December 29.
Without agreement, Russia is legally in default.
If the 95 percent vote is not accumulated by
December 29, Bank of America, the restructuring
agent on the deal, may declare Vneshekonombank
(VEB), responsible for the London Club debts, in
default, he said.
''We must consider it (default) from a realistic point
of view,'' Kasyanov said. ''Instead of having an
instrument which costs at least a bit on the market,
they (the banks) will get nothing.''
''There is a mechanism where acceptance of technical
default then requires a smaller percentage of creditors
to agree to get back around the table and start the
whole process again,'' said another analyst at a U.S.
bank.
''Everything would then be up for grabs again.''
Traders said one concern now is that Russia defaults
on the IANs, a security that is much more widely held
because it was allowed to trade via electronic
settlements system Euroclear.
Although both securities have traded at less than 10
cents in the dollar since the Russia financial crisis
exploded in August, IANs have traded at a premium
to PRINs because they were deemed to be senior
debt in the event of payments difficulties.
But bankers are now concerned that with Russia
unable to service the PRIN payments by issuing more
IANs, the government's incentive to service the IANs
will wane.
''This is yet another extremely negative development
for the market to stomach in Russia,'' said Peter
Botoucharov, emerging markets economist at
BankBoston. ''Everybody will be worse off.''
((London Emerging Markets +44 171 542 6762, fax:
+44 171 583 7239, mike.dolan+reuters.com))
Copyright 1998 Reuters Limited. |
