The financial rating agency Fitch has warned that a risk of default was “imminent” for Russia. How does a payment default materialize? What are the risks and consequences of such a scenario?
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What does state default mean?
A country is considered in default of payment when it is unable to honor its financial commitments in due time with its creditors, which may be States, financial institutions (International Monetary Fund, World Bank, etc.) or investors in the financial markets.
The default is qualified as partial when the State does not reimburse part of its obligations.
The government itself may declare itself in default by announcing that it will stop repaying its debt maturities, as Russia did in 1998, or the announcement may also come from a debt agency. notation after a 30-day grace period following the finding of default.
What room for maneuver to obtain a refund?
The default can also be formalized by a private creditor, publicly revealing that a country has stopped reimbursing it, or even by the American agency ISDA (International Swaps and Derivatives Association), which governs CDS, a kind of insurance against default of payment.
There is no guarantee that sovereign borrowings will be repaid. Contrary to a case of default of payment by a company, where it is possible to recover assets by way of reimbursement, it is not, on the other hand, possible in the case of a characterized default of payment for a State, to seize a public good located in this country to sell it, according to the experts interviewed by AFP.
Restructuring a debt means rescheduling repayments and, more often than not, reducing or writing off debts. This implies that the country is in “default”, but that it nevertheless hopes to reach an agreement with its creditors.
What loan is it in the case of Russia?
Russia has a bond loan which matures on April 4 and which concerns two billion dollars. “This loan was issued on the London Stock Exchange in US dollars,” explains Slim Souissi, deputy director of the IUP in Caen, a banking specialist who worked for Fitch and wrote his thesis on state failure.
It will be a question of knowing on April 4 whether or not Russia has been able to pay its debt maturities, its creditors being mainly American investment funds.
What are the risks that default will materialize?
Credit rating agencies, including Fitch, S&P Global Ratings and Moody’s, consider it a matter of will and that the loans may not be repaid in full in the face of sanctions imposed by Western countries in response to the Russian invasion of Ukraine.
“The country has the means to repay this debt issued on the financial markets, but can decide not to do so to respond, for example, to Western financial sanctions,” explains the professor.
Russia, which has almost doubled its stock of gold and foreign currencies since 2014-2015, has foreign exchange reserves which reached more than 640 billion dollars as of February 18.
To preserve them, Moscow has also recently limited the outflow of currencies abroad.
What are the consequences if the default hypothesis is confirmed?
“The creditors will lose the amounts lent, but this should not cause a systemic crisis,” said Mr. Souissi.
A conflicted debt restructuring arrangement seems out of place to debt specialists.
A payment default automatically cuts off a statement of the financial markets and jeopardizes its possible return for a few years.
It took twelve years for Russia to be able to return to borrow on the markets after defaulting on its domestic debt in 1998, when its economy was destabilized by a financial groundswell from Asia.