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21 Jul, 2010 06:54

Bank default casts pall over debt issuers

Bondholders of the International Industrial bank are gathering later on Wednesday to decide on restructuring after it defaulted on 200 million euro in the first Russian bank default in a decade.

Analysts say one rotten apple can spoil the whole barrel. International Industrial bank was the first Russian bank to default on an external bond since the financial crisis of 1998. Aleksey Moiseev, Chief economist at Renaissance Capital says this could undermine the bright bond prospects of Russia’s recovering banking system.

“Many investment firms, they cannot afford to keep an analyst looking at a particular bank, so they look at sectors. And maybe they can afford to spend 55 of their time looking at Russian banking sector. Obviously, chances are, that many people decide to be safe and not look at any Russian banks, simply because this one bank failed.”

Global investors have been increasingly enthusiastic about Russian bond placements in the last half year. Led by Sberbank and Vnesheconombank, Russian companies, have borrowed as much as $2.5 billion in the international bond market over the past two months. Yulia Tseplyaeva, Head of Research at BNP Paribas Russia, says the outlook for the banking sector is improving.

“We see clear improvement in the banking system, following to economic recovery in Russia. So with oil prices above $70/bbl and potential for growth in oil prices this makes Russian risks more attractive for investors.”

Analysts say borrowing conditions will become even more favorable in autumn when investors come back from vacation. The US Federal Reserve is also expected to indulge in another round of quantitative easing which effectively means it will be printing more money. Aleksey Moiseev believes this will

“That will obviously result in an increase in liquidity globally, because clearly the Fed remains the main global provider of liquidity to the world economy. And that typically results in a significant improvement in conditions environment for emerging market bond issuers to tap international markets.”

How long Russian companies will be able to borrow money relatively cheaply from the bond markets is hard to predict. But analysts warn that recovering confidence is so vulnerable that even one-off defaults could shut the market overnight.