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. Last Updated: 07/27/2016

NEWS ANALYSIS: Pakistan Jitters Putting Pressure on Eurobonds




Since Russia's economic meltdown began last summer, almost every tradable security associated with the nation's wealth has been either written down or wr itten off. From treasury bills to stocks to corporate bonds, only the "untouchable" sovereign Eurobonds have kept their heads above water.


Now, even these debt instruments are falling. The Eurobond issue maturing in 2007 fell to 25 percent of face value, and the issue maturing in 2028 with a 12.75 coupon slumped to 27 percent.


These slumping prices are not due to any sudden deterioration in the country's capacity to meet its Eurobond obligations; Pakistan is apparently to blame.


Last month, Pakistan came to a preliminary agreement with the Paris Club of creditor nations on restructuring $3.3 billion in foreign debt due by the end of December 2000. However, the Paris Club's regulations require that any country restructuring club debt seek "comparable terms" for all of the country's foreign debts.


For the first time, the Paris Club is demanding that the Pakistan debt restructuring include that country's Eurobonds, raising fears that Pakistan is being used as a test case for Russia, which owes $70 billion to the Paris Club and has $16 billion outstanding in Eurobonds.


Even though both the Russian government and several analysts have been quick to pour cold water on such suggestions, the markets have taken fright at the first real hint that sovereign Eurobonds could lose their "default-proof" status.


The Russian Finance Ministry has reiterated its intention to fully service the country's Eurobond obligations several times since Standard & Poor's downgraded the bonds to a CCC rating at the beginning of February, suggesting a high probability of default.


Eurobonds have long been considered among the safest form of emerging market sovereign debt, thanks both to their onerous cross-default provisions, which mean that the full principal falls due the moment a payment is missed, and the non-negotiable status written into the Eurobond contracts.


Analysts said that the attitude of other international creditors that Eurobonds should perhaps lose their special status was understandable.


"The Paris Club has had to roll over roughly $65 billion since 1995," said Mikhail Arkhipov, a trader with Nomura Securities in London. "Now they might try a new scheme, which will force bad debtors to pay, on Pakistan."


Pakistan's case could set a precedent in the treatment of Eurobond holders, one that could apply to holders of Russian Eurobonds, he said.


For now, Eurobonds, despite their low prices, are still the only Russian assets traded at reasonable levels. But the Pakistan concerns are not the only factors pushing traders to sell Russian Eurobonds.


According to Arkhipov, a lot of people would like to sell Eurobonds short at 27 to 30 percent of face value.


"Uneximbank proved that Eurobonds are no better legally than any other debt," he said. "Uneximbank's case implies that higher prices on Eurobonds just reflect market assumptions."


However, other analysts said that even if the Paris Club succeeds in winning equal treatment for its debt and Eurobonds in Pakistan's case, a similar situation with Russian Eurobonds was unlikely.


"Some brokerages could have described such a possibility in their research pieces," said Alexei Zabotkin, an economist with United Financial Group in Moscow.


"There's just some panic in the markets," said Zabotkin. "But equal treatment is still not a very viable option."


"Equal treatment is not possible, no matter what the creditors say," said Gregory Grushko, managing director with Aton.


Others said that the Pakistan effect had been overrated. "People are currently more concerned with Brazil than Russia," said a London trader who declined to be identified. "There is capital flight from Brazil and all emerging markets are reeling."