Ambrose Evans-Pritchard has a fascinating article in today’s Telegraph. It is fascinating on many levels.
For one, it helps explain why European banks have been battered even worse than American ones. European banks invested in made-in-America subprime (which suggests that Americans are not uniquely culpable for that problem), but they also plunged far greater sums into emerging market investments, all of which are plummeting in value. The travails of European banks, and the prospects of worse to come, also helps explain the dramatic weakening of the Euro, the pound, and the Swiss franc.
Although US subprime has attracted most of the attention, because it cratered first, it is clearly not the only source of toxicity in bank balance sheets. It is becoming increasingly evident that low interest rates, attributable in part to the Asian savings glut and partially to liberal US monetary policy (less so European directly, but in an open economy Europeans didn’t have complete control over their interest rates) that encouraged yield shopping in a big way, and yield shopping means “add risk” in any language.
For another, the article also has some interesting tidbits about Russia. To wit:
Russia too is in the eye of the storm, despite its energy wealth – or because of it. The cost of insuring Russian sovereign debt through credit default swaps (CDS) surged to 1,200 basis points last week, higher than Iceland’s debt before GÃ¶tterdammerung struck Reykjavik.
The markets no longer believe that the spending structure of the Russian state is viable as oil threatens to plunge below $60 a barrel. The foreign debt of the oligarchs ($530bn) has surpassed the country’s foreign reserves. Some $47bn has to be repaid over the next two months.
As Michel pointed out in a comment to another post, the heavy indebtedness of the oligarchs presents the Russian government with several unpalatable choices (though DR does not find them as bad.) Bailing the oligarchs out of their foreign denominated debt would put a large dent in, and perhaps exhaust, the massive reserves that Russia has so assiduously accumulated in the past several years. Since most of the debt is collateralized by shares in companies, many of which are Russian (though, again per DR, some are in the US and Europe), oligarchic default would transfer large ownership positions in “strategic” Russian businesses to despised foreigners. Or, the Russian government could expropriate the oligarchs/nationalize their businesses, and hang the Western lenders out to dry. By so doing, they would keep their “crown jewels” out of the hands of foreigners (and, conveniently, in the control of the siloviki in the government), but (a) this would turn Russia into a pariah that would have acute problems accessing capital markets in the future, and (b) destroy value by concentrating even more control over enterprises in state hands, which distorts incentives and encourages rent seeking.
My guess is that in the short to medium term, the government will try to buy time and dole out financial support to the oligarchs in the hope that things will turn around. Only if the country’s reserves are depleted too rapidly, or the reserves fall to an uncomfortably low level, will the government contemplate something more extreme. And if it comes to that, I would wager that Russia would choose “pariah” over ceding substantial stakes in “strategic” businesses–even minority stakes–to foreigners. The latter option is too much at odds with the entire rationale for Putinism, and would drive the nationalist elements in Russia around the bend, thereby jeopardizing Putin’s domestic support. Given the choice between stickin’ it to The Man (i.e., foreigners) and living without foreign capital (who needs those bloodsucking bastards anyways?), and being labeled a traitor to the motherland, I think it’s pretty clear which way Putin would jump. But maybe he’ll get lucky, things will turn around, the price of oil will recover (along with the world economy) and Putin will never have to make that hard choice. That’s why buying time and spending the reserves makes sense in the near term.
But, suffice it to say, that the worm has truly turned in the last three months. During that short time, Russia has gone from globe straddling giant (in its own mind, anyways) to a gambler looking to survive by drawing an inside straight. Not that things are rosy in the USA, but as bad as things are here, I’d rather play our hand than Putin’s.