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An article from CNN starts out by stating that Russia "has defaulted on its foreign debt", but then appears to qualify the statement by observing that "Moscow has a grace period of 30 days from April 4 to make the payments". Generally speaking, a grace period is a time period in which a payment is not considered late, so it would seem that default has not yet occurred and will not occur until the grace period has ended. With a 30 day grace period from April 4, this would mean that Russia will not default on the applicable payments until at least May 4, 2022.

As of April 11, has Russia actually, formally defaulted on its debt, or is it only in grave danger of doing so unless superhuman feats of international finance can be achieved?

To be clear, the question I'm asking is whether Russia has clearly and unambiguously defaulted on a payment that they were clearly obligated to make, not whether Russia is in a financial crisis (however that might be defined) or currently has the means to pay its debts as they become due. If an unpaid debt is already past due, that would normally constitute default. If debts are not yet due but Russia is unlikely (in the opinions of those who are considered qualified to make such opinions) to be able to pay them when they become due, that would seem to be an impending (future) default rather than an actual one that is already receding into history.

In response to o.m.'s statement that Russia is "unwilling-or-unable" to pay, that gets right back to my question. My question is whether default, as it is defined in international finance, is already a completed, historical event in this case (e.g. "Russia defaulted at UTC 00:00 on April 11, 2022"), or whether everyone is sort of standing around with gaping jaws counting down the minutes or seconds to actual default. To make a metaphor, has the Titanic already hit the iceberg or is it simply going so fast that only Superman can stop it now before it hits?

If default has already occurred, can we identify the exact date and time of default? If default has not yet occurred, do we know the exact date and time that default is predicted to occur?

If you feel that distinguishing formal default from "pretty much gonna default" is too pedantic, then I raise you the difference between an aircraft being "at takeoff" and actually taking off. Alternately, it's the difference between "Never gonna give you up" versus an actual lifetime of fidelity.

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    FWIW, Russia probably has more than one sovereign debt outstanding and the media coverage suggesting otherwise is probably oversimplifying the situation.
    – ohwilleke
    Apr 11 at 22:08
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    Also, it took quite a while after hitting the iceberg until the Titanic sank Apr 13 at 12:33

3 Answers 3

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No - Russia has not currently (April 11th 2022) defaulted on its sovereign debt. What the CNN article is referring to is S&P’s downgrading of the country’s credit rating to ‘selective default’. This is a prediction by S&P, and while probably a fairly decent prediction, is not the same as Russia legally defaulting on its debts. S&P has made this prediction based on pronouncements from Russia’s finance minister stating that the country considers that interest payments made in rubles fulfil its obligations - suggesting that the country will make no effort to remedy the situation with dollar payments within the 30-day grace period.

S&P issued the following explanation along with the rating downgrade - according to the FT:

We currently don’t expect that investors will be able to convert those rouble payments into dollars equivalent to the originally due amounts, or that the government will convert those payments within a 30-day grace period.

A default, selective or otherwise, will only be triggered if Russia does not change its stance, and neglects to issue payments to investors in the correct currency before this 30-day period ends. The payments due are a coupon payment and a repayment of a maturing bond, both of which were due on April 4th but which were blocked by JPMorgan after consultations with the US Government - again according to the FT. The 30-day grace period will therefore expire on May 4th.

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    A selective default is a default on some but not all debt, or for some but not all creditors. It is not mainly a prediction of a future full default.
    – o.m.
    Apr 11 at 19:40
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    @o.m. Sure, but S&P is predicting a selective default. Russia is not currently in default or a selective default, until the grace period runs out.
    – CDJB
    Apr 11 at 19:46
  • You're not citing any source for your view that CNN's definition of default is wrong. And on a quick search I can't find conclusive definitions one way or the other. See economics.stackexchange.com/questions/51068/…
    – Fizz
    Apr 12 at 2:07
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    It's also worth noting that S&P nor any other international agencies are going to be (allowed to) provide ratings for Russia or any Russian entities, starting April 15, due to EU sanctions. spglobal.com/ratings/en/research/articles/…
    – Fizz
    Apr 12 at 3:03
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    @Fizz if you read the FT article I linked, it explicitly states this: "Moscow has a 30-day grace period to get the cash to investors before it is in default, but S&P said this was unlikely to happen."
    – CDJB
    Apr 12 at 7:57
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In international finance, a credit event is a legal and contractual term which means that financial instruments like credit default swaps come due. Such a credit event can happen if the debtor has no money, if the debtor is unwilling to pay, or if the debtor has money but cannot transfer it. The last is called a logistical default, and it is a kind of default.

As I understand it, Russia is unwilling-or-unable to pay a debt in the currency in which it is due at the date when it is due. The date has a grace period to make up missed payments, but the currency does not. So offering rubles to the creditors is breaking the contract.

Imagine you and I enter a contract where we agree that I will deliver a pound of apples to your front porch, either today or possibly, if I really can't make it today, then tomorrow at the latest. Now I say that I'll give you two pounds of carrots instead, which you can collect today from my warehouse. That wasn't the deal.

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    When you say that Russia is "unwilling-or-unable", that gets right back to my question. If Russia is currently unwilling or unable to pay but that changes by the day the debt is due, then that would mean they avoid a default, right? My question is whether default has already been reached or whether we are in "the final countdown" to default where a miracle might save them. Apr 11 at 19:07
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    @origimbo that sounds like an answer, that saying that default has already happened is a simplification of the real situation and that the reality is that of a future default that only a miracle can stop. Is that correct? Apr 11 at 19:26
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    But is a strong-arm tactic the same thing as default? If I say, "Accept this or else I will probably default next month", that implies that default is still in the future. It may be likely or even imminent, but still a future event rather than a past one. Apr 11 at 19:49
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    Not clear to me whether the doctrine of anticipatory breach applies here. In a normal contract if you indicate that you plan not to perform a contract according to its terms that is a breach even if the final deadline for performance hasn't yet arrived.
    – ohwilleke
    Apr 11 at 23:41
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    That wasn't the deal. though even in that case, you aren't in breach of contract until tomorrow (the "latest by" date) has passed and you haven't delivered. The proper response to your carrot offer is: "That's nice, but I still expect my apples to be here, tomorrow latest."
    – Tom
    Apr 12 at 8:10
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Contra to the black-white answer that the questions asks for (and that one answer provides, contradicting CNN), in international finance, unlike how rating agencies treat your student loan, the grace period does seem to count as being at least in technical default.

Technical default is a situation in which the borrower violated the loan agreement by not making another payment to the debt holder, but physically they can fulfill this agreement and they have the financial resources to pay off the debt.

In practice, a technical default is performed only by those issuers that are really experiencing financial difficulties, because in case of a technical default, the issuer immediately loses its reputation as a stable borrower, the opportunities for further placements are reduced, and potentially future issues will be placed at a higher rate.

After the delay in payment of the bond, a grace period begins (the period within the framework of a technical default), during which the issuer must pay off the debt so that the security does not go into the “default” status. Quite often, a technical default does not end with the bankruptcy of the borrower. After overcoming difficulties during the grace period and paying off their obligations, the issuer can establish work and further prevent violations of obligations.

Likewise:

Default occurs if the issuer failed to fulfill its obligations on the due dates and further within the technical default period (during the grace period). The grace period is specified in the issue documents, but it can also be fixed by law.

And a 3rd time explained

As applied to the bond market, the grace period is the period after the occurrence of a technical default, within which the issuer can pay the amount owed on the coupon, execute the call or repay the principal amount of the debt. If the issuer manages to fulfill its obligations, then the technical default does not go into the default status. However, if prior to the end of the grace period the issuer was unable to make the payment, a default occurs. During the grace period, investors and creditors cannot file claims to initiate bankruptcy procedure for the issuer.

So, given that Russia failed to pay in the previously agreed currency, by the previously agreed date of April 4 (due to US Treasury blocking the transaction) and that Russia tried to pay in rubles instead (by making an internal transaction and asking foreign debt issuers to somehow get their money from Russia, which they can't due to Western sanctions and Russian capital controls combined) there's at least a technical default that took place (on April 4), from my reading of this event according to the quoted definition(s) above.

Amusingly, perhaps, even TASS seems to agree with my interpretation, as last time when Russia was allowed (by the US Treasury) to make such a payment, TASS headlined that "Russia avoids technical default".

Some other texts distinguish between technical default and "actual default" (called just default above) based on intent. Likewise commercial EU regulations define default as a combination of technical default (payment obligation past due) and "unlikeliness to pay". Whether Russia is not in "actual default" is perhaps more debatable, as that depends on their intent (how) to rectify the situation. Insofar they've announced a lawsuit... which normally doesn't count as payment.

The Securities Industry and Financial Markets Association (SIFMA) uses somewhat different terminology:

Default. The failure of an issuer to make a full Interest, Principal, or payment-inkind payment when due, or to meet other obligations to the bondholders, such as maintenance of collateral or compliance with financial or other covenants. An issuer may be said to be in Default even though any Grace Period has not yet expired. [...]

Event of Default. A Default that continues after the expiration of any Grace Period. An Event of Default allows bondholders to exercise the remedies specified in the Indenture, potentially including accelerating the maturity of the bonds, liquidation, rescission or annulment. [...]

Grace Period. The period of time if any, during which an issuer has the ability to cure a Default (e.g., make an Interest or Principal payment after missing a Payment Date or return to compliance with financial ratios) before the failure becomes an Event of Default. During this period of time, an issuer’s creditors cannot act to force an involuntary bankruptcy proceeding based on the Default.

It's also worth noting that international credit rating agencies will not be legally able to provide any further rating on Russia, starting on April 15. So this is a somewhat unusual situation in that regard as well, which might have forced them to pre-declare Russia's status as "parthian shot".

According to Reuters, there is one significant aspect to the grace period: ISDA determination committees (for credit default swaps) don't normally meet until the grace period has passed. I tried to confirm that detail from ISDA's beefy internal regs, but I couldn't, so it might be an unwritten rule.

There's also an IMF working paper/chapter (meaning not an official position of the IMF) that gives somewhat more weight to the grace period though:

It is surprisingly hard to define sovereign default. [...]

Contractual Default includes the occurrence of any EoD [Events of Default] or equivalent that also constitutes default under specified reputable third-party definitions. [...] At a minimum, it is reasonable to consider missed payments and payment shortfalls that persist for longer than 30 days (a typical grace period) as contractual default, regardless of debt form and creditor identity. [...]

Technical Default includes any contractual EoD occurrence or equivalent for domestic and official debt that does not also constitute default under third-party definitions, such as those used by rating agencies and in standardized derivatives contracts.

And they have a 3rd def for "Substantive Default" due to Collective Action Clauses (CACs) imposing haircuts, even though those may not be recognized as defaults under standard legal definitions. But, related to that, they also note that:

Third-party definitions are often pithier than those found in debt contracts, and focus on economic substance (payoff). Third-party definitions of default can have major economic consequences, for instance, when they are used to trigger credit rating downgrades or credit default swap (CDS) payouts. Many economists, and the most widely used datasets on sovereign default, use rating agencies’ definition of default (e.g., Reinhart and Rogoff 2009). [...]

As information intermediaries, credit rating agencies have developed distinct methodologies for evaluating sovereign default, which inform their analysis and ratings. Their criteria focus overwhelmingly on payoff. They reference underlying credit agreements but are both far more streamlined and broader than EoD. For example, Moody’s definition of default includes three kinds of events:

(i) failure to pay interest or principal within the grace period under the debt agreement,

(ii) a distressed debt exchange that reduces the sovereign’s financial obligation to avoid payment default, and

(iii) unilateral change in payment terms “imposed by the sovereign that results in a diminished financial obligation, such as a forced currency re-denomination … or a forced change in some other aspect of the original promise, such as indexation or maturity.” (Moody’s 2018)

Whether point (ii)-(iii) apply to the Russian case is left as exercise to the reader. Moody itself, unlike S&P apparently has made no decision in that regard, yet.

That paper does however also note (agreeing with Reuters on that) that under ISDA definitions though

Failure to pay incorporates any applicable contractual grace periods.

So no ISDA "Credit Event" may be triggered until the grace period expires (according to those sources).

On the other hand an ISDA committee was asked to weigh on the matter of the April 4 event, even though the grace period hasn't expired... (If you wonder about the terminology used there-in: according to somewhat older (1999) ISDA defs that can found on-line, "Potential Failure To Pay" (def 1.12) excludes the grace period whereas "Failure To Pay" (def 4.5) includes the grace period.)


Mini-update: Fox Business has later (April 15) quoted Moody's take:

Russia "therefore may be considered a default under Moody's definition if not cured by 4 May, which is the end of the grace period," Moody's said in a statement on Thursday [April 14].

Somewhat related (and informative as to the time frames we can expect such determinations): on April 11, the state-owned Russian Railways company was judged in default by ISDA's Credit Derivatives Determinations Committee; the company had missed a bond payment on March 14, which had only a ten day grace period.

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    Based on the sources that you cite, it seems that there is a distinction between "default" and "technical default". Russia appears to currently be in "technical default" but not "default". It is helpful to explain all this, but it seems that there is a black-and-white answer to the question and it is "Russia is not (yet) in default".
    – Matthew
    Apr 12 at 9:39
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    @Matthew: if you read further, not all sources use the term default in the same way. See the SIFMA part, for instance.
    – Fizz
    Apr 12 at 10:26
  • This is a great answer that covers the exact terminology being used and how "technical default" does not always fall under the common, ordinary dictionary definition of "default". Similarly, there is often a distinction in military parlance between "officers" (e.g. generals, captains, and lieutenants) and "non-commissioned officers" (e.g. sergeants and corporals), even though non-commissioned officers are, technically, considered officers. The terminology is a convenient shorthand used to simplify reality. May 5 at 13:49

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