MOSCOW: A default is a default. The attempted euphemism of “technical” default came up with regard to the Greek debt in 2012 at the G8 meetings. Geithner and Obama lobbied the IMF and ECB shamelessly to bail out Greece, simply so that it could pay bondholders, because U.S. banks had issued credit default insurance (CDS) against Greek bonds and were on the hook for a big loss if a default occurred. The ECB suggested euphemizing default as a “voluntary renegotiation,” asking banks and other bondholders to agree to write down the debt.
But according to the international bondholders’ organization – the International Swaps and Derivatives Association (ISDA) – credit defaults can be triggered if a debt restructuring is agreed between “a governmental authority and a sufficient number of holders of such obligation to bind all holders,” making it mandatory. According to the ISDA’s definitions: “The listed events are: reduction in the rate of interest or amount of principal payable (which would include a ‘haircut’); deferral of payment of interest or principal (which would include an extension of maturity of an outstanding obligation); subordination of the obligation; and change in the currency of payment to a currency that is not legal tender in a G7 country or a AAA-rated OECD country.”
That sounds pretty clear. Getting the ISDA to classify the bond swap as a “credit event” enables holdouts to collect default insurance from their counterparties. There is little such insurance here, but bondholders can then move to seize government property abroad. This is what Paul Singer’s vulture fund has done with Argentina, writing new international law that will apply to Ukraine.
Under London debt laws (where Russia’s debt is registered), Parliament would have to designate Ukraine as a HIPC country (such as the African countries Singer has gone after) to block creditor behavior. I don’t see Parliament doing this for Ukraine, as its poverty is self-imposed by warfare.
If the IMF were to claim that Russia’s $3 billion loan is not official, this would rewrite international law and mean that loans from Sovereign Wealth funds of any nation (OPEC, Norway, China, etc.) have no international protection. Such a double standard would fracture the world’s debt markets along New Cold War lines – with financial warfare replacing military warfare. I doubt that the world is ready for this “nuclear” financial option.
