Russian debt shockwave
By Fred Brenchley, London
Facing losses running into billions, Western banks, financial groups and investment funds will know today what the forced $US40 billion ($68 billion) restructuring of Russia's short-term debt market will cost them.
Reflecting the severity of the situation, Russia's special IMF envoy, Mr Anatoly Chubais, said the forced swap of short-term debt into longer-term, lower-yielding paper would be "extremely tough".
Speculation on the cost of Russia's debt restructuring hit overseas markets on Friday, with Wall Street initially falling 283 points before recovering to a 77.76-point loss at 8533.65. The early sell-off was led by many of the big players in Russian Treasury bills (GKOs) and emerging markets, including Citicorp, Chase Manhattan, JP Morgan and Bankers Trust. Australia did not escape the contagion of economic and financial fears sweeping markets from Russia back into Asia, particularly China, the US and South America. The $A was driven to a 10-week low of US58.18› in New York on Friday, before ending at US58.33›, still half a US cent weaker than its local close. The Australian dollar is expected to come under pressure this week and possibly test its 12-year low of mid-June.
In a sharp echo of Asia's domino effect, a speculative attack on Venezuela's currency spread to Mexico, Argentina and Chile on Friday, where market indices fell 7 to 8.5 per cent. OPEC member Venezuela looks set to become the latest emerging economy to seek IMF support.
South America has suddenly been spooked by last week's nasty confluence of events - the massive Russian devaluation and effective loan default, President Bill Clinton's Lewinsky dramas and the US's subsequent missile attacks on Afghanistan and Sudan.
"All the markets in Latin America are looking bad. This is about Russia and Asia, and Venezuela definitely brought it home. People are starting to get scared over Latin America," said fund manager Mr Gabriel Ruiz of Argentina's Banco Quilmes.
According to Ms Karen Pringle, senior markets economist at ANZ Investment Bank in Melbourne, the latest developments affected Australia through the commodity markets, "as Russia and Latin America are large producers and exporters of a range of commodities".
In Europe, German banks like Commerzbank, Dresdner and Deutsche Bank were also undermined by developments in Russia, while Credit Suisse First Boston, a major player in the Russian GKO market, saw its share price drop.
London rumours suggested that Credit Suisse First Boston could be facing losses of between $US500,000 and $US1.5 billion, but a spokesman said the size of losses, if any, would not be known until after today's restructuring.
Dow Jones' Barron's reported at the weekend that several US hedge funds with Russian GKO exposure were in trouble, and those such as the aptly named High Risk Opportunities Hub Fund which had leveraged their way into Russian debt faced "a wipeout".
Domestic debt market restructuring is part of the Yeltsin Government's devaluation and 90-day debt repayment moratorium, but details were delayed after foreign banks complained they were being treated unfairly compared to Russian investors.
Mr Chubais has now promised equal treatment, but also indicated that some of Russia's 1,400 banks might be forced to the wall.
"The main priority we have is to keep the whole banking system viable in Russia . . . I stress the whole banking system, but not separate banks," he said.
Mr Yeltsin's Government has organised a pool of support for 12 banks, raising suspicions that inclusion depends more on political connections than importance to the banking system.
Western bank involvement in the GKO market is variously estimated from $US15 to $US26 billion. US reports say that six American financial groups - Chase, Citicorp, BankAmerica, JP Morgan, Bankers Trust and First Chicago - had $US6.74 billion of total cross-border exposure to Russia at the end of March.
If Russia adopted a Brady Plan-style restructuring of 35 per cent writedowns the cost to these groups could be about $US1.5 billion, or about a month's earnings according to US analysts.
Chase Manhattan says its exposure to Russia is about $US500 million.
Russia has hinted that the restructuring could be accompanied by approval for foreign banks to operate in Russia.
Others speculate that Moscow may allow restructured debt to be swapped for privatisation credits in the future.
Meanwhile, Russia's communist-controlled Duma has called for Mr Yeltsin's resignation, changes to central bank leadership, renationalisation of some banks, limits on foreign participation in markets and printing of money.
While Mr Yeltsin, who has substantial powers of decree, has shrugged off the Duma's call, his Prime Minister, Mr Sergei Kiriyenko, says Russia's crisis may have only just entered its worst phase.
"We have just entered a serious financial crisis," Mr Kiriyenko said, urging the Duma to work with the Government. "We cannot allow ourselves the luxury of being a popular government."
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