Russian Debt default?

SILVERHARP2 · Post by **SILVERHARP2** » 24 Oct 2008, 15:50

Russian Default Risk Soars: LTCM Repeat Play

The Telegraph is reporting Russian default risk tops Iceland as crisis deepens.

Russia's financial crisis is escalating with lightning speed as foreigners pull funds from the country and the debt markets start to price a serious risk of sovereign default.

The cost of insuring Russian bonds against bankruptcy rocketed to extreme levels yesterday. Spreads on credit default swaps (CDS) reached 1,123, higher than Iceland's debt before it sought a rescue from the International Monetary Fund.

Moves by Hungary, Ukraine and Belarus to seek emergency loans from the IMF have now set off a dangerous chain reaction across Eastern Europe. Romania had to raise overnight interest rates to 900pc on Wednesday to stem capital flight, recalling the wild episodes of Europe's ERM crisis in 1992. The CDS spreads on Ukraine's debt have topped 2,800, signalling total revulsion by investors.

Rating agency Standard & Poor's issued a downgrade alert on Russian bonds yesterday, warning that a series of state rescue packages worth $200bn (£124bn) could start to erode the credit-worthiness of the state.

Russian companies must roll over $47bn of foreign loans over the next two months, and a further $150bn or so next year, a task that has become close to impossible as investors flee Eastern Europe.

"The surge in Russian CDS spreads is paralysing the whole system. The government can offer very little help to the banks at this point because its own sovereign debt is in question," he said.

"This crisis is starting to look like the Black Wednesady in 1992. Unless we see an extension of central bank swaps in dollars and euros to Eastern Europe within days to stop this uncontrolled process of deleveraging, this could get out of control and do serious damage to Western Europe. We could see the euro fall to parity against the dollar by next year," he said.
Genius Fails Again

It is fitting that Russia is back in the news because it was the demise of Long Term Capital Management that kicked off a string of moral hazard interventions by the Fed that continues to this day.

Totally_Baffled · Post by **Totally_Baffled** » 24 Oct 2008, 15:54

Who would of thought Russia would be so vunerable given the amount of money they have been making from their vast energy exports!

Nobody seems to be safe!

Whose next? Saudi Arabia?

Andy Hunt · Post by **Andy Hunt** » 24 Oct 2008, 15:59

Totally_Baffled wrote:Whose next? Saudi Arabia?

I doubt we will see any bank managers getting their hands chopped off anytime soon.

emordnilap · Post by **emordnilap** » 24 Oct 2008, 16:10

Totally_Baffled wrote:Who would of thought Russia would be so vunerable given the amount of money they have been making from their vast energy exports!

Exactly where is that money at the moment?

Totally_Baffled · Post by **Totally_Baffled** » 24 Oct 2008, 16:18

emordnilap wrote:
Totally_Baffled wrote:Who would of thought Russia would be so vunerable given the amount of money they have been making from their vast energy exports!
Exactly where is that money at the moment?

Im buggered if I know.

In doing some research for another thread I discovered that Switzerland (a country famous for being a creditor nation), has 4 times its own GDP in external debt!

Ok, I understand the points made by the "money is debt" video - but its still confusing how creditor nations can have as much debt as the debtor nations!

Im off for a beer or two! - maybe this will bring clarity...

SILVERHARP2 · Post by **SILVERHARP2** » 24 Oct 2008, 16:19

emordnilap wrote: Exactly where is that money at the moment?

I dont have your money, its in Igors football team, and Ivan's football team....................

Vortex · Post by **Vortex** » 24 Oct 2008, 16:26

It's in $200 million yachts ... and their party kitties ...

PS_RalphW · Post by **PS_RalphW** » 24 Oct 2008, 16:39

My naive view of money is that it is created as debt by the banks, who then charge interest on the debt. Interest is debt which is created without any balancing money to pay off that debt - in over words, there is always more debt than money, and an accelerating amount of debt. This must inevitably lead to a position where every person and institution in the world simultaneously has more debts than assets. Since this is a totally illogical position money at that point ceases to have any meaning.

Anyway, as far as Russia goes, I don't believe anything I read in the Torygraph. They have forecast doom for the enemies of capitalism for so long they no longer register on my ears.

That said, if Russia (read: Putin) sees it in her (his) long term interest to default rather than bleed capital, they will.

PaulS · Post by **PaulS** » 24 Oct 2008, 18:02

Interesting question: Where is all that money?

I think it is disappearing into thin air!

Seriously. Money is created as debt and as long as the debt is being repaid, the total amount grows.

But what happens when someone defaults : not only is not more money created, but the original money (or part of it) disappears! It was loaned out and it is never repaid.

(Although having said that, the borrower would have spent the principal, so somebody should still have it, even if the borrower does not repay it. That implies that only the interest is being destroyed, not the principle)

If we accept that the total of all derivatives (=debts) is $500tr = 10x world GDP or about 5x total value of all property or 5x total value of all stocks (that was a year ago, so call it 10x), I would say we have something like 2x more debt in the world than the value of assets and GDP.

That is some $250 TRILLION dollars, most of which has to disappear in defaults: expect quite a few countries, banks, companies and individuals to go bankrupt!

Or am I not thinking straight?

Vortex · Post by **Vortex** » 24 Oct 2008, 18:35

That is some $250 TRILLION dollars, most of which has to disappear in defaults: expect quite a few countries, banks, companies and individuals to go bankrupt!

.. maybe the expected deflation followed by rampant inflation will 'lose' the excess 'value'?

grinu · Post by **grinu** » 25 Oct 2008, 14:31

That's a very good point Paul, re the fact that if money has been borrowed, it has been paid to someone to buy something and hence the money has not actually disappeared from the system. So essentially we are not seeing the destruction of money, we are seeing massive inflation of money. That is a scary thought, but it seems plausible enough to me.

But where the fck has it all gone? Is Dr Evil sitting in his underground lair rolling around in a mountain of cash laughing away and stroking one hundred meeeeee-lllleeeeeeon cats? I reckon we should all buy cat food.

My head hurts, I thought I half understood the dark arts of economics but I haven't a clue.

Vortex · Post by **Vortex** » 25 Oct 2008, 14:45

Doesn't written-off money simply disappear from the ledgers?
Gone. No longer in the system ... anywhere?

Not good for the bank 'tho ... their assets have been reduced.

I assume that the fractional banking systems then prevents money being lent against the ex-assets.

Overall bad for the banks and bad for prospective lenders.

Note: This is all pure uneducated layman's guesswork.

Post by **kenneal - lagger** » 26 Oct 2008, 01:49

Some of the money is invested in things so world capital increases but most probably goes to paying off another debt. In fact the money that buys things probably ends up paying off debt as well so it all just disappears, gets written off the books of a bank somewhere. As a debt to a bank is an asset of that bank, banks assets must be reducing rapidly as well.

With the drastic slowdown in the issuing of new debt, money must be disappearing from the system quite quickly. No wonder Grasping Gordon is looking more haggard by the day.

skeptik · Post by **skeptik** » 26 Oct 2008, 08:37

grinu wrote: But where the fck has it all gone? Is Dr Evil sitting in his underground lair rolling around in a mountain of cash laughing away and stroking one hundred meeeeee-lllleeeeeeon cats? I reckon we should all buy cat food.

An unknown quantity is sitting in socks under the bed. This is certain to be the case in Russia. Russians do not, and never have, had much trust in their banking system. At the first sign of trouble their inclination is to withdraw and place cash in a tin on the shelf. They even have a slang word for this money tin, which I've forgotten.

I too did a bit of rearrangement last month. I now have 3 bank accounts instead of one, including Banco de Calcetín.

PaulS · Post by **PaulS** » 26 Oct 2008, 10:37

As I mentioned above, only the interest part of the money can disappear through defaults on debts since the principle would have been spent on something and thus that money is back in the supply chain.

Thinking about possible solution, I have come to the conclusion that the only way out of the $250+ trillion overhang of debt is basically to print equal amount of money and inject that into the world economy in some way. This amount is about 100x more than world governments have done so far.
That would have two effects:
a) it would allow the overhang of debts to be repaid on a global scale, although it would still results in many banks and other business going bankrupt.
and at the same time
b) it would inject some 50% jump in inflation, thus halving the value of all money, but not investments, which would probably increase in line with this jump.

Then it would be a question of slowly bringing inflation down to some minimal level over perhaps a 10 year period. The total amount of inflation would probably be more than 300-400%, but that's the price of the runaway debt culture.

At least this way we may with some luck actually avoid a complete meltdown of the world financial system.