Russia Defaults; Japan to forgive loans to HIPC countries (fwd)

[Robert Weissman <rob@essential.org>]

Updates from the Preamble Center:

1) RUSSIA IN BOND DEFAULT AMID PRIVATE CREDITOR CONCERNS
2) JAPAN READY TO FORGIVE LOANS TO 41 POOR NATIONS


RUSSIA IN BOND DEFAULT AMID PRIVATE CREDITOR CONCERNS

Russia is set to default for the first time on its Soviet-era foreign currency 
bonds in a move aimed at husbanding resources to help it avoid reneging on 
post-Soviet debt, reports the Financial Times (p.3). The Kremlin is gambling 
that the IMF and Western governments will see the action as a necessary, if 
painful, step towards a comprehensive renegotiation of key elements of its
$140 
billion foreign debt, the story says.

Russia plans to miss the repayment of a full $1.3 billion tranche of
Soviet-era 
bonds, known as MinFin bonds, due next month, in order to avoid defaulting on 
dollar international bonds issued since the collapse of the Soviet Union. The 
government calculates that favoring newer creditors over old will help it to 
avoid damaging further its battered reputation in international capital
markets.

The default on MinFins, held mainly by commercial banks and other private 
investors, would form part of a deal under negotiation with the Paris Club of 
sovereign creditors, among whom Germany is the biggest lender, notes the
story. 
A deal under which Russia would default on the MinFin bonds would meet an 
important Paris Club demand: that Western taxpayers alone should not carry the 
burden of refinancing Russia, and that Wall Street should share the pain.
AP in 
the Washington Times (p.A15) and the New York Times (p.C6) also report.

The government's acknowledgment that it will default on $1.3 billion of MinFin 
bonds leaves its Eurobonds as the only class of debt on which Russia has not 
reneged, report the Wall Street Journal (p.A15) and Wall Street Journal Europe 
(p.14). But a top bank official suggested Monday that Eurobonds won't 
necessarily remain off-limits if Russia's situation worsens. The official
cited 
the example of Pakistan, which in recent negotiations with the Paris Club was 
told to include outstanding Eurobonds as part of any sovereign debt 
rescheduling.

The Pakistan example could set a precedent for restructuring supposedly 
immutable securities such as Eurobonds, the official noted. The case of 
Pakistan also calls into question the issue of treatment of creditors.
The news comes as Dresdner Kleinwort Benson official Eric Kraus writes in the 
WSJE (p.6) that Eurobonds are a vital source of foreign capital to the world's 
developing economies. Now the Paris Club and the IMF are touting a proposal 
that may shut off the tap. The plan aims to force Eurobond holders to "share 
the pain" in sovereign debt restructurings. Specifically, issuing countries
may 
be forced to "restructure"-i.e., default upon-existing bonds. In addition, new 
language would be inserted into the covenants of future bonds to allow them to 
be restructured in case of a sovereign debt renegotiation.

The prospect that nations will be required to include Eurobonds in future debt 
restructurings would significantly limit new issuance, says Kraus. At best,
the 
increased risk of buying Eurobonds would result in a general widening of 
spreads. Even those mid-tier countries currently maintaining prudent 
macroeconomic policies would be penalized due to the inability of investors to 
predict future political and economic developments.

In related commentary, Martin Wolf of the FT (p.18) says the spring
meetings of 
the IMF and the World Bank may be a last chance for policymakers to learn 
lessons from two years of turmoil in emerging markets. One lesson, as yet 
insufficiently accepted, is that foreign currency debt is an enormously risky 
way to finance economic development. Efforts to make these risks more apparent 
would be desirable even if they reduced capital flows. Indeed, they are 
desirable because they should reduce these flows.

Unfortunately, says Wolf, a powerful lobby-the creditor institutions-is
stoutly 
opposed to almost all the measures needed to achieve this result. The lobby 
justifies its rejection of compulsion or any official action to strengthen the 
hand of debtors by arguing that this would increase the cost and lower the 
supply of lending. The position is obviously self-interested. It is also 
cheeky. What it ignores is the pivotal role played by bank lending in causing 
these crises.

Inevitably, enforced changes in contracts that facilitate renegotiation will 
reduce the willingness to lend and increase the price of loans. But that is a 
consummation devoutly to be wished, Wolf writes.


JAPAN READY TO FORGIVE LOANS TO 41 POOR NATIONS

The Japanese government is ready to cancel its outstanding yen loans to 41 
heavily indebted poor nations in Africa and other regions, on the condition
that 
other industrialized countries shoulder a proportionate share of the financial 
burden to help the impoverished nations, the Asahi Evening News (p.1) reports.
Finance Minister Kiichi Miyazawa plans to express Japan's plans effectively to 
cancel debts owed by poor nations when he meets with the finance ministers and 
central bank governors of the other G7 nations on Monday, says the story. The 
outstanding loans will effectively be cancelled by expanding programs of
relief 
grants, the story quotes an official as saying. The grants would be equal to 
the amount of debt the nations repay.

In return for writing off these loans, Tokyo plans to ask the US and European 
nations to contribute more money to programs under the IMF and the World Bank 
designed to help poor nations, the story says.