We will wake up this morning to two events – one very much predicted and known and a second which is still very much unknown but which could end up having a bigger immediate impact on global markets and confidence.
The known event will be the 0.25% rise in the federal funds rate by the US Federal Reserve (to be announced early Thursday morning, Sydney time), the other is whether Russia meets nearly $US117 million in two coupon (interest) payments on US dollar debt that are due during Wednesday.
The Fed rate rise is priced in, locked in and a given – what markets will be looking for will be comments in the post-meeting statement about what happens from now on with the first rise under the Fed’s belt.
Will the language of the post-meeting statement and chair Jay Powell’s comments at his usual media conference give any more confidence about the path of US monetary policy – and whether any crisis in Russia and Ukraine above what we have seen – force the US central bank to haul back on policy?
Of interest will be whether the Fed gives itself room to modify its stance by using events in Ukraine and global markets (where the quick surge in commodity prices to record highs in some cases, has cooled significantly in the past week).
Tensions rose financial markets in Asia as the Russian payments became due. Reuters and other media say it is unclear whether western investors will actually receive their cash and whether it will be US dollars, or roubles (which are worthless at the moment).
That in turn sets up what could turn out to be a uniquely messy government debt default.
While Russia is scheduled to pay just under $US117 million in interest payments on two of its bonds, it has a standard 30-day grace period in which to pay up. If it does not, that would constitute a technical default.
The Russian finance ministry said on Monday that it had ordered the payments to be made as usual, but said its ability to do so could be curbed by western sanctions against the Russian central bank. Finance minister Anton Siluanov says those sanctions — brought in earlier this month — are bouncing the country in to an “artificial default”.
Markets have already largely priced in a default. Russia’s foreign bonds are trading at around 20% of their face value — a level that suggests very little confidence of being repaid.
Credit rating agencies, which up until late February had given Russia investment grade status, have since the February 24 invasion slashed the rating to the very lowest “junk” ratings, with Fitch Ratings saying a default is “imminent”.
Finance Minister Siluanov has said it would be “absolutely fair” for Russia to make payments on its government debt in roubles until sanctions that he claimed have frozen nearly half of the country’s $US643 billion in foreign exchange reserves are lifted.
Fitch on Tuesday made it clear that if Russia were to try to make the two bond coupon payments in roubles, rather than US dollars, it would constitute a sovereign default after the grace period expired.
“The payment in local currency of Russia’s U.S. dollar Eurobond coupons due on 16 March would, if it were to occur, constitute a sovereign default, on expiry of the 30-day grace period,” Fitch said in a statement.
In the event of a payment in roubles, Fitch said, the rating on both bonds would be lowered to ‘D’ after the grace period expires, while Russia’s long-term foreign currency rating would be set at ‘Restricted Default.’
Fitch said the local-currency rating of ‘C’ is consistent with Russia’s failure to credit foreign investors with the local-currency bond coupons that were due on March 2.
“We understand that Russia’s Ministry of Finance made these coupon payments on the 2024 OFZs to the National Settlement Depository, but they were not paid on to foreign investors because of Central Bank of Russia restrictions,” Fitch said in its statement.
“This will constitute a default if not cured within 30 days of the payments falling due” and Fitch said was now applying a 30-day grace period in local bonds, known as OFZs, even if those are not included and explained in the bonds’ documents.
