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April 19 (Reuters) - The Malaysian government on Tuesday was facing the prospect of having to bail out the scandal-tainted state fund 1MDB, after a $4.6 billion debt deal with an Abu Dhabi sovereign fund collapsed this week.
The International Petroleum Investment Company (IPIC) said on Monday that 1Malaysia Development Berhad's (1MDB) had failed to make a $1.1 billion payment, and so was terminating last June's debt deal.
"The government wouldn't want to risk having a default on its books, so if it came down to it, they would want to keep a clean record," said Krystal Tan, a Singapore-based economist at research firm Capital Economics, talking about risk of a bailout for 1MDB.
Any government intervention would pile more pressure on Prime Minister Najib Razak, who founded 1MDB and is on its advisory board. He has faced calls to step down over allegations of graft and mismanagement at the fund.
"It's (agreement with IPIC) failure not only now places 1MDB itself at risk, but now involves a bailout by the Ministry of Finance," opposition leader Tony Pua said in a statement.
The Malaysian finance ministry is the sole shareholder of 1MDB.
"He (Najib) must explain how is 1MDB going to fund the immediate repayment of $1.1 billion demanded by IPIC."
The credit market is pricing in the uncertainty.
Malaysia's Credit Default Swaps, the cost of insuring against default, has been underperforming the broad market since Monday. The 5-year contract jumped by 10 basis points on Tuesday and has risen about 15 basis points since IPIC's announcement.
The Malaysian government will have to come to 1MDB's aid, said a senior politician with the ruling United Malays National Organisation (UMNO), who did not want to be identified.
The UAE's termination of the $4.6 billion deal with 1MDB "poses an issue of cross-default", he said. Cross-default is a provision in a bond or loan agreement that puts borrowers in default if they default on another obligation.
Malaysia has total overseas debts of $98 billion, of which $47 billion is held by the central bank and the government, according to Thomson Reuters data.
The Malaysian government is currently in the midst of raising a $1.2 billion sovereign Islamic bond.
The ministry of finance said in a statement it would "continue to honour all of its outstanding commitments".
One of 1MDB's last major outstanding liabilities is a $3 billion bond, arranged by Goldman Sachs, which carries a letter of support from the federal government.
The fund, launched by Prime Minister Najib Razak in 2009, amassed over 50 billion ringgit in debt buying energy and real estate assets through projects with companies in Saudi Arabia, the UAE and other Gulf countries.
It sold off most off these assets to state-owned Chinese companies late last year.
"It is difficult to accurately ascertain the exact level of debt that 1MDB has now following the successful sale of various assets," said Chia Shuhui, Asia Analyst for BMI Research.
Regardless of the amount, a government bailout of the fund "will have a negative impact on the government's fiscal position", he said.
Oil exporter Malaysia is aiming to keep its fiscal deficit, already under pressure from slower growth and lower crude prices, at 3.1 percent of gross domestic product.
1MDB is at the centre of money-laundering and criminal investigations in the United States, Switzerland, Singapore and Luxembourg.
A Malaysian parliament inquiry found that billions of dollars had been sent to offshore accounts without the approval of its board.
One of those offshore accounts was for a company called Aabar Investments PJS Ltd in the British Virgin Islands, which received payments of $3.5 billion from 1MDB that were meant for IPIC. The Abu Dhabi fund said Aabar Invesments did not belong to it.
Najib has been under pressure to step down after reports claimed that $681 million, deposited into his personal bank account, came from 1MDB. A government-appointed Attorney General cleared Najib of any criminal offence or corruption, and said the money was a donation from the Saudi royal family.
Saudi Foreign Minister Adel Al-Jubeir said last week the funds wired into Najib's personal bank account were a "genuine" donation originating from Saudi Arabia.
$1 = 3.8995 ringgit Additional reporting by Stanley Carvalho in ABU DHABI; Writing by Praveen Menon.; Editing by Bill Tarrant