Potential Ukrainian Default Spooking Markets
Are the dominoes about to start falling? From Morgan Stanley's London desk:
Ukrainian Railway defaulted on a Barclays bond. They have another, government guaranteed obligation with DB. If DB accelerates the payment & IF it is then not paid, it will count as a government default.
We are closely following the releases out of S&P and Moody's analysts to see if they have gotten into the office after their leisurely orgy at the nearest Turkish bath insider info leak session. Potentially nothing actionable just yet, but that a government-backed bond can't make its payments, should prompt the IMF apparatchiks to promptly take the next Textron Cessna straight into Kiev (after they get 20 Goldman flu shots each) and spend a few more billions in US taxpayer money and/or sell more gold to quickly stuff even more corpses under the carpet.
(5 votes)
on Fri, 11/20/2009 - 08:47
#137147
how big is the bond issue in question?
on Fri, 11/20/2009 - 11:17
#137334
110M + 8M interest
The DB bond is bigger: 700M
on Fri, 11/20/2009 - 08:49
#137151
It's ok someone has some default swaps that get stuck on government debt sheet that says I win until the tax revenues that jumped off the cliff never return.
on Fri, 11/20/2009 - 09:47
#137203
The key question is whether the Ukrainian Railway has a bunch of default swaps riding on this? In theory, they could make up more than enough here to cover the default.
But then it goes into the pockets of whoever has the CDS.
And that's way this whole system is going to come crashing down. Some day, someone is going to figure out the profit motive here and cause a default which has the unintended consequence of triggering the whole house of cards to crash.
But they won't care, as they'll be thinking that they're going to get rich. Goldman Sachs did exactly this on AIG.
This ponzi scheme works until there's such a crash that there's no money left to pay off the one's who started this.
We all know it's just a matter of time.
on Fri, 11/20/2009 - 12:57
#137514
Well ya. It's netting. They stitch themselves together to make themselves stronger and lose the ability to sacrafice losses. So it's all or nothing.
General public
Too much or nothing
http://www.lala.com/#song/576742248792138195
on Fri, 11/20/2009 - 13:29
#137565
Yep. CDS obligor will be found insolvent and will in turn default. It may really only take one big bump and its all over. USA backstopped the first foray on AIG. But I doubt any foreign countries can or will.
Just a waiting game now.
on Fri, 11/20/2009 - 08:54
#137152
Oh boy.
IMF, EBRD urge E.Europe banks to recognise losses
11.17.09 Thomson Reuters
The European Bank for Reconstruction and Development's (EBRD) Chief Economist Erik Berglof said that delaying the build-up of both non-performing loans and of the reserves set aside to cover them was particularly pronounced in Ukraine. 'The country that illustrates best the lack of recognition is Ukraine where all the banks have been 'evergreening' credit,' Berglof told reporters on the sidelines of the conference.
Ukraine, whose economy is on track to shrink by 15 percent this year, has one of the highest levels of bad debt in Europe with about 30 percent of all loans impaired at the end of the second quarter. The banks' strategy to go easy on building reserves has allowed them to safeguard profits and avoid massive dilutive cash calls at depressed prices earlier this year. But having run down the ratio of reserves to non-performing loans to as low as 50 to 60 percent -- from close to or more than 100 percent going into the crisis -- there is little room left to manoeuvre.
The biggest lenders in emerging Europe are Italy's UniCredit , Austria's Raiffeisen International and Erste Group Bank, Societe Generale, Belgium's KBC and Hungary's OTP.
http://www.forbes.com/feeds/afx/2009/11/17/afx7130485.html
on Fri, 11/20/2009 - 08:57
#137153
thanks for the info TD. love the intro paragraph.
so, when is eastern europe going off the cliff? or spain, italy, greece?
the UK???
Japan???
on Fri, 11/20/2009 - 09:06
#137161
From Cashin today:
2000 Points In Two Days – We have been cautioning on TV and in these notes that the dollar could have a major impact on the stock market. Yesterday, we got a very brief hint of what that might look like. A small bounce up in the dollar knocked 170 points off the Dow in less than 90 minutes.
Imagine what could happen if some geo-political event suddenly turned the greenback into a “safe haven currency”. A rush to load up on safe dollars would catch the “dollar carry” traders flat footed. The short covering explosion would vastly exacerbate the flight to safety frenzy. The impact on the stock market could be stunning – some traders speculate that you could see a 2000 point drop in the Dow in two days. Let’s hope geo-politics stay dull.
This is exactly why I cannot be long risk, nor anything who's move has been -1 correlation to dollar, including precious metals. One of the eastern european countries WILL devalue, and that will set off a chain reaction. Or, Venezuela and Colombia go to war. Or, Iran/Israel, Saudi/Iran/Yemen tensions flare out of control or the Ukrainian mutant virus spreads and causes collapse, or someone sacks Tiny Tim (in multiple ways) or whatever...
on Fri, 11/20/2009 - 09:33
#137188
Exactly what I'm concerned about.
on Fri, 11/20/2009 - 09:42
#137193
Might this also cause Gold to diverge from the S&P as it too becomes a safe haven asset?
Over the last couple of weeks I've noticed that Gold initially follows the S&P down when the $ strengthens, only to diverge and recover quickly.
It's been easy to compute as the Gold and S&P both trade in to 1050-1150 range.
on Fri, 11/20/2009 - 09:51
#137211
A short safe haven. It will last until people have to pay off their debts (as in the ponzi finance of derivatives).
When that happens, the only thing which counts is dollars, and there won't be enough of them to go around, no matter how fast Crazy Ben tries to ramp up the printing press. The markets always move faster.
on Fri, 11/20/2009 - 11:28
#137357
look...we went through this last year already with the near collapse of OUR banks and OUR economy.
There is no limit to FX swaps, none. They can print whatever they need. Look, the Fed's balance sheet grew over a trillion and a half in the span of a few months.
You need to think through your thesis...if dollars became scarce, how would the US GOV'T pay ITS bills? It would cause the US to default, then those dollars are worthless.
This priceless dollar's lifespan will be measured in minutes.
on Fri, 11/20/2009 - 17:20
#137894
You need to think through your thesis. They can't print faster than markets can collapse. Sorry.
on Fri, 11/20/2009 - 19:22
#137990
California is falling apart as it is. After a short period of dollar scarcity, California would no longer be able to keep paying police and prison guards. Same goes for a long list of states, counties, and cities all over the US.
The Gubb'ment/Fed would do everything imaginable, including shutting down markets, in order to avoid this.
If they didn't, foreign investors would abandon treasuries, most likely in exchange for gold, after it did.
on Sat, 11/21/2009 - 13:57
#138246
California is small potatoes in this game. Think bigger, as in the U.S..
The Fed actually does have limits to its powers. As an old saying goes, the markets eat Central Bankers for lunch. And they'll do so again. IMHO, within the next year.
on Fri, 11/20/2009 - 13:31
#137572
Beijing, Bombay put. They're in the know and any global fire will show them dumping $$ to all the "safe haven" seekers as they plow into gold while it has its panic discount.
on Fri, 11/20/2009 - 09:39
#137191
The carry trade is definitively a ticking time bomb. But the question is how do you expose yourself to the upside while buying cheap hedges for a "black swan" downside?
on Fri, 11/20/2009 - 09:47
#137202
I'm counting on it. Some very obvious items first off: 1) The whole world has been shorting the dollar. How long does any one-sided trade last?
2) the Fed/Treasury needs a market dropping "flight to quality" to keep selling debt in the amount and yield they have, now that QE has ended.
3) Can the market really maintain these PE levels unless there is some sort of economic miracle?
Any of the above will bounce the dollar without the need for any major Black Swan event.
on Fri, 11/20/2009 - 11:28
#137356
I disagree with you completely.
1)Not the whole world is shorting the dollar. Most Americans from main street still don't get the message yet. The flee from dollar has just started.
2)If treasury rallies, dollar should tank even more.
3)In a hyperinflation scenario, your nominal "E" explodes so is the nominal "P", under a constant P/E ratio.
on Fri, 11/20/2009 - 22:50
#138080
That's the classic gold bug hedge. Show me in US history where even a micro-hyperinflation has pumped P with E...
on Fri, 11/20/2009 - 11:31
#137364
1) How long did the CROWDED Yen Carry Trade last?
2) Rates are ALREADY zero. They cannot drop yields further. The US sovereign issues are NOT QUALITY. I cannot fathom how ANYBODY could see the US Bond as QUALITY. We're inarguably freaking BANKRUPT. $12T in debt, against a GDP of about the same amount, omitting that a lot of our GDP is FIRE fiction! We ran a headline $1.4T deficit last year with no end in sight, have our two major entitlements programs now in operating deficit...where is the quality here?!??!
3) No. But in the case of fiat paper collapse, market valuations will be expected to be voodooish
on Fri, 11/20/2009 - 13:39
#137584
Once the fed goes in the penalty box, it can never come out.
The world and system will be completely reordered before this conundrum can be fixed by any monetary, political, or fiscal policy world round.
I salute you with a bomb shelter buh-bye!
on Fri, 11/20/2009 - 13:36
#137580
TPTB don't want safehaven seekers in $$$ so much as in Treasuries. Either way only direction is down.
Fed will print to fund mismatches in Treasury demand. Holders now are scrambling to unload the $$ hot potato already. $ as safehaven status is losing out to AU. The solid surplus $$ holders have few debts or accounts they must us the majority of their cash to settle.
They are salivating at the prospect of a $$ spike.
Sold to you. I will take physical delivery now if you please.
on Fri, 11/20/2009 - 15:02
#137699
Absolutely correct, chinaguy. I am counting on it, too. I can see thousand-pip moves in the dollar crosses pretty easily when this thing comes crashing down.
But your question is the right one- and the million-dollar question:
How long does any one-sided trade last?
To the naysayers all about their gold:
Not everyone is going to buy $1200/oz. physical gold and demand the trade upon completion. In fact, very few people will because, frankly, gold is just another worthless metal. Who cares?
But back to the USD crosses: inherent weakness in the US economy is going to exacerbate weakness in other markets. Whether you like it or not, the old agade, "when America sneezes, the world catches cold," is still true. When the US economy tanks, all other functioning markets will take a wose hit than we do. And so and therefore, the USD will strengthen on that fact alone. I mean, where else are they going to go? The Norwegian Krona??? Man, that was so last year!
Get a reality check, all you guys saying the dollar is going into the toilet. Next time, just ask yourself relative to what? The yen? Not gonna happen. The renminbi? Please. The ruble? dinar? crown? rupee? lira? What? What exactly has the unfettered strength to bury the greenback?
That's right. Nothing. And as for your physical gold, be sure to have an honest assay performed, as that may be hard to come by, too.
on Fri, 11/20/2009 - 09:52
#137213
do you have the cashin link?
on Fri, 11/20/2009 - 09:52
#137216
do you have the cashin link?
on Fri, 11/20/2009 - 09:54
#137219
Gold is more likely to explode upwards and dollar more likely to crash during the next phase of the crisis. If you're long the dollar, you're most definitely long "risk", my friend.
on Fri, 11/20/2009 - 10:14
#137238
You see a flight to gold .vs a flight to the dollar? It hasn't been happening in the past 50 or so years (notice short T bills are at negative yield). That said, I already have 1/3 of my assets in dollar hedges. And where as "yes" the dollar is toast out over several years, I do not see it toast out over several months. ,Mmmmm, toast...time for breakfast.
on Fri, 11/20/2009 - 10:17
#137242
See, you're describing the past which is no guarantee of what will happen in the future. Circumstances have changed quite a bit since then I'm afraid, especially for the dollar. It's in it's death throes right now, IMHO.
A bubble in it's last manic stages.
on Fri, 11/20/2009 - 10:47
#137287
How does it come out, as negative yielded T-Bill is competing with gold?
on Fri, 11/20/2009 - 13:21
#137548
Real interest rates nominal plus GDP deflator,
ie 12 to 72% for T Bills to Credit Card, Pawn or
Quick Loans...
on Fri, 11/20/2009 - 11:33
#137368
Was the US inarguably INSOLVENT 50 years ago?
The swap lines are already there to CRUSH any foreign dollar liquidity issues. Plus you can borrow dollars from the Fed at 0%.
These programs are INTENDED to mitigate or eliminate any threat of dollar deflation.
on Fri, 11/20/2009 - 10:41
#137280
Don't forget Syria: http://www.wtop.com/?nid=778&sid=1816869
on Fri, 11/20/2009 - 13:16
#137540
Gold not a big enough market to park or trade.
Bonds and Dollars are.
Check out the 10 year today.
Dollar shops as gold and stock drops...
on Fri, 11/20/2009 - 08:57
#137154
Maybe this is what the H1N1 scare in Ukraine is really about.
on Fri, 11/20/2009 - 08:59
#137156
UKRAINE NOT WEAK!
on Fri, 11/20/2009 - 10:34
#137270
Bunny says: "Rawr"
http://mts1.files.wordpress.com/2009/02/yulia-tymoshenko2.jpg
on Fri, 11/20/2009 - 11:38
#137375
hahaha... I wouldn't have known what you were talking about had I not seen that episode of Seinfeld the other day.. hilarious! :-)
on Fri, 11/20/2009 - 15:35
#137759
Another quote from that episode comes to mind. "Risk. A game of world domination being played by two guys who can barely run their own lives." I have this mental picture of Timmy running away with the board and Ben chasing him.
on Fri, 11/20/2009 - 15:45
#137776
The rodent and the chipmunk, respectively.
on Fri, 11/20/2009 - 15:05
#137718
Let us all pray for my beloved Ukraina.
on Fri, 11/20/2009 - 09:08
#137163
Tarzan said it best:
http://www.zerohedge.com/article/deadly-flu-spreads-across-ukraine#comment-132437
on Fri, 11/20/2009 - 09:10
#137164
(Just got this on my desk) Should probably update post.
UKRAINE. NOT NEW. FROM JON AMACKER ON CS's EMEA DEBT DESK
there are vicious rumors circulating in the market that Ukraine Railways has or will default on a loan - i have been contacted by eqt guys, fx guys, everyone getting excited about this breaking news (whch was apparently revealed to the world by an FX desk here in London an hour ago).... lots of frantic calls.
This rumor is actually factually correct - since it happened A WEEK ago. Its also factually correct the loans are not sov-guaranteed and they do not cross default into any other outstanding loan.
on Fri, 11/20/2009 - 09:11
#137167
Alfa Bank Ukraine could be in trouble.
Moody's withdraws credit ratings of Alfa Bank Ukraine
19.11.2009 - Moody's Investors Service
Moody's has withdrawn these ratings for business reasons following the official request from Alfa Bank Ukraine.
Headquartered in Kiev, Alfa Bank Ukraine reported total assets of USD3.8 billion and total equity of USD447 million, according to IFRS financial statements at the end of 2008.
Issuer's rating:
Standard&Poor's CCC+/Negative Int. Scale (foreign curr.) 07.08.2009
Standard&Poor's uaB National Scale (Ukraine) 07.08.2009
Standard&Poor's CCC+/Negative Int. Scale (loc. curr.) 07.08.2009
Moody's Investors Service Withdrawn National Scale (Ukraine) 18.11.2009
Moody's Investors Service Withdrawn Int. Scale (foreign curr) 18.11.2009
Moody's Investors Service Withdrawn Int. Scale (loc. curr.) 18.11.2009
http://www.cbonds.info/all/eng/news/index.phtml/params/id/448601
on Fri, 11/20/2009 - 09:15
#137170
Moody's most recent rating action on Alfa Bank Ukraine was on 17 August 2009 when the rating agency confirmed the bank's local and foreign currency debt and deposit ratings at Caa1 and placed a negative outlook on them.
on Fri, 11/20/2009 - 09:16
#137171
THis is really nice one.
on Fri, 11/20/2009 - 09:17
#137174
I'm from Belgium, and this looks like the biggest nightmare ever!!
The bad debt from the Ukrainian is backed up by our government for 200 biljion!! (for the total eastern Europe that bad debt is in total 1.6 triljion) That would make our national debt go X4! (and I already pay 55% taxes on my income...
Lets see if our new European President can get us out of that mess :(
on Fri, 11/20/2009 - 09:31
#137186
We have a Waffle shortage here in America. It's getting bad!
google
Kelloggs Waffle Shortage
on Fri, 11/20/2009 - 09:44
#137196
Let's raise some capital and start our own Waffle factory.
on Fri, 11/20/2009 - 10:19
#137243
http://www.youtube.com/watch?v=4YyEdny5rh8
Buy Waffles!!
on Fri, 11/20/2009 - 11:27
#137355
Thank God the Slim Jim factory got rebuilt fast.
on Fri, 11/20/2009 - 09:22
#137176
What is the size of the default? I read online saying they missed principal payment of $400 million -- doesn't seem like a big deal (in the grand scheme of things). What am I missing?
on Fri, 11/20/2009 - 15:08
#137721
There are two loans: one for $110m and another for $700m.
The big deal would have been if it were soveriegn debt that the government of Ukraine cannot pay back. That is not the case. No one has a lien against the government in this matter.
on Fri, 11/20/2009 - 09:22
#137177
Get real. Debt IS wealth, people. Don't you remember that congressman who told us so? How do you think we bought all these fancy things? (sarcasm off)
on Fri, 11/20/2009 - 12:37
#137470
http://www.youtube.com/watch?v=UjbPZAMked0
Pete Stark on how debt is wealth. Plus how he'll "throw you out the window"
on Fri, 11/20/2009 - 09:25
#137181
Ukraine default is complete and utter bullshit. Some hedgies involved in the Ukraine Railways loan restructuring are apparently trying to spread this around. The rumor actually caused quite a bit of jitters in CEE FX as well!
Ukraine Railways has two different syndicated loans. $440m Barcap loan (which is being restructured) has no sovereign guarantee. Then there is a $700m Deutsche Bank loan that matures in 2011 and is indeed guaranteed by Ukr government. The Barclays loan was provided to the operating subsidiaries and the Deutsche loan was provided to the holding company and (lawyered!) there is no cross-default from the Barclays loan to the DB one to the government.
Sovereign curve in Ukraine strenghtening right now..
on Fri, 11/20/2009 - 09:26
#137182
Is this why interest on short-term FED paper turned negative?
on Fri, 11/20/2009 - 09:29
#137183
ICE cancelled dollar trades this morning after they caused the dollar to spike and S&P futures to drop - while they "investigate"
http://www.marketwatch.com/story/ice-investigating-spike-in-dollar-index...
on Fri, 11/20/2009 - 09:37
#137189
i'm in Europe and i can say that they're quite oblivious to the risks....even large Italian banks with significant exposure in Eastern Europe play down the risks or claim that the risks are well contained....sounds vaguely familiar...
ciao
on Fri, 11/20/2009 - 09:37
#137190
Nov. 20 (Bloomberg) -- Debt owed by Ukrzaliznytsya, the Ukrainian state rail company, doesn’t contain so-called cross- default clauses that would force redemptions on loans guaranteed by the government, according to a report by brokerage Dragon Capital today.
Ukrzaliznytsya has missed a principal payment on its $440 million three-year syndicated loan arranged by Barclays Capital in 2007, Dragon Capital said in its research note. The company’s other external liabilities include a $700 million seven-year loan from Deutsche Bank AG arranged in October 2004 and guaranteed by the government and a $120 million long-term loan from the European Bank for Reconstruction and Development dating from August 2004, according to the brokerage.
“While Ukrzaliznytsya said it was making timely payments on the EBRD loan, we do not rule out the company’s liquidity problems could complicate matters,” Dragon Capital said in its report. “On a positive note, we clarified with government lawyers that the $440 million loan, which had been arranged by Barclays, and the state-guaranteed Deutsche Bank facility were provided to two different legal entities and do not contain any cross default covenants.”
That means Ukrzaliznytsya could restructure the Barclays loan without forcing the redemption of its state-guaranteed liability, the report said.
http://www.bloomberg.com/apps/news?pid=20601085&sid=aPBmeyBQzwyU
on Fri, 11/20/2009 - 09:55
#137221
Bring it on. Let the games begin.
on Fri, 11/20/2009 - 10:30
#137262
And here I was thinking that the Fed would push the S&P up until March.
Disclosure: Significant amount of canned food.
on Fri, 11/20/2009 - 10:55
#137294
Then, after Chinese New Year.
on Fri, 11/20/2009 - 11:10
#137318
Nothing terrible could probably happen with Ukrainian govt. while they pays for Russian gas transit. What is this missed payment compared to the flow of money to Moscow, and who is that Barclays compared to Gazprom.
And of course, thousands of an average Joe could die of any kind of flu, because their immune system is destroyed by synthetic food and overconsumption of a cheap booze - that would not affect the stability of 1/4 European gas supply.
on Fri, 11/20/2009 - 17:45
#137406
Tyler, How about an update of your Eastern Europe 10 February post? This looks like the spot to watch closely now,
http://zerohedge.blogspot.com/2009/02/glance-at-upcoming-eastern-europea...
Stratfor left Ukraine out of this analysis and it looks like a flash point: elections, gas pipeline problems with Russia, IMF situation fragile, flu, mounting problem loans,
http://www.investorsinsight.com/blogs/john_mauldins_outside_the_box/arch...
on Fri, 11/20/2009 - 12:36
#137469
Ukraine is weak.... let the dominos start to fall it is time to clean the system and throw the Geitners and Paulsons of this world in prison for life.
http://www.youtube.com/watch?v=fzLtF_PxbYw
on Sat, 11/21/2009 - 21:33
#138496
I am out of work as of this week. I have $5,000 to invest. Any suggestions ?
on Sun, 11/22/2009 - 01:01
#138580
All I know is that when I see infomercials and commercials en mass for buy/sell gold non-stop, I know the you know what is about to hit the fan. Remember the home flipping infomercials? You dont see those anymore , gee I wonder why?
As soon as they start reeling in the average Joe, its almost the end. My theory for the dollar dropping is to prevent China from cashing in, instead of waiting a few more years.
All I can say about Ukraine is imitation is the finest form of flattery.
on Tue, 11/24/2009 - 05:28
#140346
I live in Ukraine. It is a nice place, very Russian (I added that gratuitous comment to piss off the Canadian nationalists that sometimes lurk such fora.)
So far, currency spreads are within normal parameters, people are calm, noone rushing to get hard currency or precious metals or anything. The swine flu panic has mostly been exposed as a tacky ploy by the politicians. Don't believe the hype.
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