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This is quite intesting. Responding to unprecedented instability and turmoil in the global banking industry, in late Feb the Global Finance magazine published a mid-year update of its top 50 list of banks it considers to be the safest. Usually its update is done yearly.

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A serious financial crisis is continuing to unfold in Russia.

Capital outflow: In the last few weeks, foreign investors withdrew their money out of Eastern Europe, the Russian stock market has fallen over 60%, and the government has been on a spending spree trying to prop up the collapsing markets. The very small rally Russian markets have experienced in the last 5 days are rumoured to be due purely to government’s share-buying activities.

As I wrote recently, the government committed a package of $120bn (and some sources say, $200bn) to bail out struggling large Russian banks – against the backdrop of some bank runs and bankrupcies of the smaller players.

Oil price collapse: Coupled with the above, the price of oil has recently fallen back beyond the $70 per barrel, now standing at about $67. Russia needs the oil price to be above $70 to break even and balance its national budgets (compare this to $95 for Iran and and Venezuela, and $50 for Saudi Arabia. Source – NY Times).

So, as Russia makes less and less money through its oil exports and wasting ever-increasing sums of money on propping its markets, where does this leave it?

Debt overload: Predictably, not in a very good position. Russia has accumulated a lot of foreign loans and in the next couple of months, needs to roll over $47bn of them. As there are very few investors left wishing to extend their support to struggling economies, this task will be exceedingly challenging. In total, Russia has $530bn worth of foreign debts, clocked up during the recent years of massive market expansion and over-confidence. Of these, another $150bn are falling due to be refinanced in 2009.

On track for downgrading: S&P issued a warning that it might downgrade Russian government bonds reflecting the declining credit-worthiness of the state. However presently, it maintains a credit rating of BBB+, the third lowest investment grade. If Russian bonds are downgraded further, this means they will lose their investment grade status, and any further credit to the country will cost it even more.

Moody’s downgraded the Russian financial outlook from “stable” to “negative” in the last week, citing “slowing asset growth, higher inflation, the slump in equities and funds leaving the country, all of which could result in deteriorating fundamentals for banks” as reason for its decision.

Credit default swaps, which are being taken out as means of insuring investors against (in this case) Russian government bankruptcy, are reflecting this in their pricing. CDS spreads (the difference between the buy and sell quotes), which serve as a measure of risk tolerance, are widening massively, reaching a 1,123, which is higher than spreads on Iceland’s debt before it sought a rescue from the International Monetary Fund, reports the Telegraph.

Russian government heading for bankruptcy? Thus the creditworthiness of the Russian state is in itself in question. It may be that the Russian government is heading for a default on its foreign debt, as it did fairly recently in 1998 – although the situation in 1998 and 2008 is somewhat different.

 

Copyright 2008 by CuriouslyInspired

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