08/12/1998 20:39:42 US investors ask if Russia's debt swap was mistake
By Apu Sikri
NEW YORK, Aug 12 (Reuters) - Hindsight, it is said, has 20/20
vision. In that case, Russia's recent $4.1 billion swap of
short-term bills for longer-term dollar debt may have been a big
mistake, according to some investors and analysts here.
The debt exchange provided an easy exit for holders of
short-term Treasury bills, known as GKOs, looking to cut Russian
exposure. At the same time, it dumped another $4 billion in the
dollar bond market at a time when investors were already reeling
under the weight of oversupply.
"The debt swap was kind of a disaster," said Gretchen Rodkey,
sovereign analyst at Bear, Stearns & Co. "It killed the secondary
market, but it did not raise enough money in the primary market"
to buy back the GKOs.
Robert Koenigsberger, portfolio manager at Gramercy Advisors
in New York, added that the debt exchange let "GKO holders, who
were paid 80 percent yields to take on Russia risk, to go scot
free. But it has effectively closed the capital markets for
Russia. It may well have been a huge mistake."
With GKO yields hovering in the prohibitively expensive 140
percent range, Russia may well have to restructure outstanding
GKOs or devalue the rouble, Koenigsberger added.
Russia has not been able to raise money in the domestic bill
market for the past four weeks, and it may well have to
restructure its outstanding stock of GKOs, according to investors
Russian officials said Wednesday the republic would use about
$1 billion of International Monetary Fund monies to pay out on
GKOs coming due. The equivalent of $20 billion in GKOs is coming
due this year and another $14 billion in the first six months of
Russia's Finance Ministry took other steps to preserve foreign
currency reserves. It put a ceiling on foreign currency purchases
by local banks, which helped only to refocus market attention on
the increasing vulnerability of the rouble against other major
currencies, traders said.
Investors contend Russia will need another injection of funds
besides the $22.6 billion provisioned by the IMF.
Also on Wednesday, Russia's benchmark dollar bonds, the PRINs,
declined to an all-time low of 26.
"Russia should be the ward of official creditors and not
market creditors," said Michael Rosborough, portfolio manager at
the Pacific Investment Management Co., which manages $4 billion in
emerging market bonds but has stayed away from Russian debt.
"Russia cannot service debt at 80 percent to 140 percent
yields without fixing its fundamental problems," he said.
Jonathan Schiffer, sovereign analyst at Moody's Investors
Service, said Russia's ability to service short-term debt has
always been a concern with the rating agency.
"We pointed that out in March when we downgraded Russia's
foreign currency rating to Ba3, and we were derided for it. People
said after missing out on Asia, Moody's is being overly cautious
on Russia," he said.
In a release accompanying that downgrade, Moody's said
"rapidly growing domestic debt on the Treasury bill market has
complicated the debt servicing position of the federal government
and has placed increasing pressure on an already-difficult
Moody's subsequently downgraded Russia's foreign currency
rating to B1 in May.
Standard & Poor's, the other leading credit rating agency,
rates Russia at single B-plus.
Investors said the possibility of an additional multilateral
package for Russia to meet its short-term debt obligations cannot
be ruled out. The issue will likely be discussed in a meeting
between Russian officials and U.S. Treasury Undersecretary for
International Affairs David Lipton in Moscow this week, according
Bankers also said they believed informal discussions about
Russia's ability to meet its debt obligations were afoot among the
IMF, the U.S. Treasury, the State Department and Russian Finance
Officials at the IMF and the Treasury declined to comment.
Officials at Goldman, Sachs & Co., the investment bank that
arranged the debt swap, were not available to comment.
(( -- N.A. Treasury Desk, 212 859-1562 ))