At the beginning of September, the U.S. Treasury allowed trading on Russian debt for one week. During that time investors poured over $1 billion into Russian bonds as part of what is called a credit default swap auction. Coming just three months after Russia was ruled to be in default to numerous creditors.
Credit default swaps can be thought of as an insurance policy on corporate or governmental debt. Examples of these types of debts are bonds and loans. Bonds are essentially an I.O.U. between the bond issuer and the bond purchaser with and can act as a way for a corporation or government to sell their debt to investors hoping to receive a fixed interest rate return over time. Loans are, of course, money that has been loaned from one entity to another and must be paid back in installments over time. In a credit default swap the contract buyer pays a premium over time and the seller agrees to cover any losses on the debt if it goes into default, acting as an insurance policy. After the borrower is ruled to be in default an auction is then held to disperse funds owed to the buyers and also give them a chance to sell the bonds. During this time protection sellers are also given the chance to buy defaulted bonds in an effort to offset any losses they have incurred.
Credit default swaps, according to the Bank for International Settlements data, are the second largest over-the-counter market in the U.S. There is speculation that these transactions create higher systemic risk. This risk arises from the fact that these types of markets are full of speculation and uncertainty in the valuation of the debt in question at the time of the agreement. Therefore, creating more uncertainty in critical times. The credit default swap event that occurred when investors bought Russian debt through the purchase of Russian bonds is a perfect example of how systemic risk can be elevated as a result of these transactions.
Earlier this month (September 2022) investors who either purchased or sold protections against a Russian debt default were interested in purchasing roughly $500 million in Russian bonds and roughly $800 million of investors requesting to sell. Resulting in a bid total of roughly $1.3 billion. Goldman Sachs Group Inc. was the only investment bank participator in this auction to purchase Russian bonds backed by the Kremlin.
According to Fabien Carruzzo, head of the derivatives group with the law firm Kramer Levin Naftalis & Frankel LLP., the higher demand from buyers during this auction period is suggestive that some of the protection sellers wanted to lessen their exposure by artificially inflating the price of the Russian bonds, thus reducing what they would owe to the protection buyers.
During times of war and constant global friction, what are your views on Americans purchasing Russian Debt? Is this just a case of investors being investors and trying to make the best investments their dollars can buy, or is this a case of individuals trying to help a wounded Russia and dampen the burden of their vast defaulted debt?
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