Gazeta: “Vaccine against Wall Street infection”
Konstantin Tikhonov, Yulia Lokshina, Maxim Tovkailo
VLADIMIR PUTIN PRESCRIBES FINANCIAL THERAPY
Vladimir Putin announced unprecedented measures to support the financial system yesterday. The Central Bank will transfer about $50 billion to the Foreign Economic Bank (VEB) from gold and currency reserves. It will be used to issue loans to companies that are unable to pay back foreign credits.
This brings the total government aid to the market to over 4 trillion roubles. The move is more than timely, as the RTS index had dropped by 7.1% at the close of trading yesterday. The bonds market has ceased to exist, according to its participants. Trading in some corporate, municipal and even state-guaranteed bonds was suspended. This was to a large degree a reflection of the situation in external markets: the MSCI All-Country World Index dropped by 4.4% yesterday, the biggest slump of the shares of major world companies since October 1997.
Opening a conference on Plan 2020, Prime Minister Vladimir Putin recalled that the causes of the problems in the world financial system are in the US, and so far the American authorities have been unable to remove them. "The infection seems to have spread to Europe," Mr Putin said.
The government proposes to fight that scourge by using the budget and Central Bank reserves. Mr Putin recalled that 250 billion roubles of budget money had been reserved to support the stock market (the first installment of 75 billion will be reserved before the end of the year). In addition, the Central Bank will deposit about $50 billion with the VEB. According to Deputy Economic Development Minister, Andrei Klepach, the Government will withdraw that money from the gold and currency reserves. VEB can use that money to credit banks and companies that are unable to repay foreign loans due to a shortage of liquidity. The total amount the state is ready to use to bail out the market has exceeded 4 trillion roubles.
Simultaneously, access to money is being simplified. The Central Bank is soon to start issuing loans to banks without collateral. The regulator also plans to compensate some domestic banks for their losses as a result of crediting other banks. This is essentially an attempt to boost confidence between banks. At present, they have practically stopped issuing mutual credits for fear of losing the money.
The Government's measures, according to Mr Putin, will make it possible to fill the banking market with liquidity within a short space of time. A task force set up at the Finance Ministry will develop further means of resolving the difficult situation in the financial market. The task force will include government officials along with experts and businessmen.
The Prime Minister's remarks are well timed. Our market faced another shock yesterday, this time coming from the debt sector. The bonds of several issuers dropped by an unprecedented 10%+. As a result, trading was suspended and, for some types of paper, postponed by several days. Not only corporate bonds, but also the bonds of the Moscow Region (seventh issue) plummeted. They lost more than 10% of their value, falling to 81% of their nominal value, in the first two and a half hours of trading.
Among other bonds, one should single out those of the Housing Mortgage Credit Agency which dropped by 12%. Trading was suspended for an hour for both types of bonds, which is unprecedented for paper of such high quality. The drop of the Housing Mortgage Credit Agency paper may be particularly bad for the market mood, because they are underwritten by the state and have been widely used in REPO deals.
The bonds of the company Wild Orchid and URSA Bank dropped even more dramatically yesterday. Their trade was postponed until October 1 because their prices had dropped by more than 15%. Also yesterday, the company Radionet announced a technical default on coupon payments worth 82 million roubles, and trading in third issue Martha Finance bonds was also suspended. The Martha holding announced the start of the process of financial rehabilitation.
A number of events precipitated the drop of securities of major issuers. In the opinion of Ivan Manayenko, chief of the debt market analysis department of the investment company Veles Capital, the sharp drop of the Moscow Region bonds could have been provoked by the downgrading of its rating by Standard & Poor. "The news came against the backdrop of an overall trend of selling packages of bonds by market participants who are desperately short of liquidity," he says. Uralsib analyst Denis Poryvai notes that the slump of the bonds of top echelon issuers closely linked with the state is a logical consequence of waning confidence in government companies after the technical defaults of NPO Saturn and Mostransavto. A possible downgrade of the Moscow Region's credit rating is due to the fact that the region does not have enough money to meet all its obligations, including the companies it controls. "However, there is no fundamental threat of the region defaulting on its obligations because the state, as represented by the Finance Ministry or some other agency, will in any case bail out the region," the analyst writes.
SITTING ON A CUSHION
The main conclusion of bond market watchers is that the market practically does not exist. According to Nikita Korentsvit, head of the debt securities department with the company Solid Management, the bonds market has become totally illiquid.
"It is practically impossible to sell paper, even that of the Housing Mortgage Credit Agency. All the market participants are sitting on their money and are not in a hurry to spend it. In fact, we are witnessing the folding of a pyramid. Those who were active in REPO dealings now have to hold catastrophic sales. Those who can afford not to sell securities do not sell. Even so, the bonds are not exactly snapped up in the market.
"The only notable sign is that some companies buy out the paper of issuers with whom they are affiliated and who they trust. There have been attempts to buy out some bonds by the market makers of issues, but they quickly satisfied their appetites because although the bonds were sold below price, they still have limits on purchases," the expert said.
"Many sold paper that had been previously pledged under unfulfilled REPO transactions. People are trying to collect liquidity. That is to be expected: when rates for borrowers soar upwards of 20%, nobody wants to keep bonds at 12%. Also, one has to bear in mind that, for example, the Housing Mortgage Credit Agency's paper is on the Central Bank's pawn list, but only the bank can do REPO deals with them. An investment or insurance company that needs money can only sell in the market," adds Andrei Shalimov, Treasury Chief with the Vozrozhdeniye Bank.
"In the absence of transactions, two or three lots change the price dramatically, because there is no liquidity in the market," said Dmitry Popkov, Chief of the Trade and Money-Market Sales Division with Petrokommerz Bank. "A single deal could send prices tumbling by more than 10%," Denis Poryvai agrees.
In his opinion, however, even more surprising is the fact that such a drop did not occur earlier, given that market liquidity was very low and any significant sales could have brought about the same results. "In connection with this, one can expect trading in the bonds market to be suspended repeatedly," he concluded. "There are many questions regarding unfulfilled corporate bond offers, and many of them are to be fulfilled before this year is out. Balances in CB accounts are large. It means that everybody prefers liquidity to paper," says Mikhail Zaitsev, First Deputy Chairman of the Board of Investbank. "The final deadline for tax payments has arrived, and some people may have had an urgent need for liquidity. One can pity those who are getting rid of paper because they are apparently in big trouble. Perhaps some have failed to fulfill REPO obligations and are selling collateral, but that means that they are suffering big losses and having big problems," adds Nikolai Kashcheyev, the head of the VTB Treasury's Analytical Department.
WORLD CONFLAGRATION
The world stock market yesterday experienced the biggest slump since the Asian crisis in the late 1990s. The MSCI All-Country World Index dropped by 4.4%, the biggest drop in shares of major companies worldwide since October 1997. The European Dow Jones Stoxx SM 600 index dropped by 5.4%, the sharpest drop since January 2005. The Brazilian Bovespa index dropped by 6.8% at the start of trading and the Mexican Bolsa by 3.4%.
The collapse of stock indexes was triggered primarily by the troubles of many banks in the US and Europe, some of which went bankrupt while others were bailed out by the state. The American stock market looked better than the world shares market at the start of trading with the Dow Jones down 4.2%, S&P 500 down 5.7% and NASDAQ down 6.0%. That said, the Russian market yesterday dropped even below the European markets. The RTS index dropped by 7.11%, falling to 1194.11 within a day. The MICEX index dropped by 5.5% to 1019.64. The prices of most Russian liquid shares were down 3-8% at the end of trading. Against the backdrop of continued economic crisis, the prices of oil futures dropped to below $100 per barrel. Light Sweet crude dropped by 6.6% on Monday, which also had a negative impact on the Russian oil and gas sector.
