FUKT 2 - The Shafting Continues? The Big Question on Wall Street Is Which Banks Owe $41 Billion on Credit Default Swaps on Russia

There is a known $41 billion in Credit Default Swaps (CDS) on Russian debt. There is likely many billions more in unknown amounts. There are also billions more in Credit Default Swaps on state-owned Russian corporate debt and non state-owned Russian corporate debt.

In addition to Wall Street not knowing which global banks and other financial institutions are on the hook to pay out on the Credit Default Swap protection they sold in case of a Russian sovereign debt default (or Russian corporate debt default), there is also approximately $100 billion of Russian sovereign debt (whose default is looking more and more likely) sitting on the balance sheets of foreign banks.

Put it all together and you have the makings of a replay of the 2008 banking crisis when banks backed away from lending to each other because they didn’t know who would fall next from toxic subprime exposure. That led to a liquidity crisis and the unprecedented involvement of the Federal Reserve secretly pumping trillions of dollars into the megabanks on Wall Street and their foreign derivative counterparties.

The cost of buying a five-year Credit Default Swap on Russian debt has spiked from 5 percent of the total value of the debt in early February to 46 percent last Friday to 58 percent this morning. The market has now priced in an 80 percent likelihood of default.

Russia’s debt was downgraded to junk status on February 25 by Standard and Poor’s. On March 3, Moody’s and Fitch downgraded the debt by six notches, also placing it in junk territory.

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Russia Sanctions Put $41 Billion of Default Insurance at Risk

Citi warns sanctions could trigger swaps and prevent payouts
Swaps signal 65% chance Russia will default within five years
[link to www.bloomberg.com (secure)]

Contracts insuring $41 billion of Russian sovereign debt may be rendered worthless, even as they signal a record likelihood of default.
That’s because international sanctions placed on the country in response to President Vladimir Putin’s invasion of Ukraine may both trigger credit-default swaps and also prevent the underlying bonds from being used for settlement, according to strategists and investors at Citigroup Inc., CreditSights Inc. and Vanguard Asset Management.
“As it stands the sovereign debt can be deliverable into CDS,” said Nick Eisinger, co-head of emerging-markets active fixed income at Vanguard in London. “The challenge will be how to do the auction if indeed this is fully sanctioned.”

Last Edited by PANDEMIC OF THE VACCINATED on 03/07/2022 08:10 PM