GRAPHIC-Investors pricing Russia credit ratings downgrade
By Sujata Rao and Vincent Flasseur
LONDON, Sept 18 (Reuters) - Investors are starting to price the risk of Russia's credit rating falling to junk if Western sanctions and Moscow's response plunge the economy into recession and deplete its $450 billion reserves.
Being investment grade - at least BBB minus from Standard & Poor's and Fitch or Baa3 from Moody's - allows a borrower to tap a far wider pool of investors, and losing that ranking would be likely to cause big outflows from Russian markets.
Moody's, which rates Russia Baa1 or three notches above junk, said this week that the latest sanctions were credit negative. Fitch has a negative outlook on its BBB rating, two notches above junk, while S&P rates Russia BBB-minus with a negative outlook.
But investors are already treating Russia as being as risky as junk, according to the following graphic, which compares credit default swaps (CDS) of several developing economies against their credit ratings:
Bond market investors typically use CDS to insure against non-payment of debt, but they are also often used as a proxy to gauge how risky an entity is, which is why there is a close relationship between credit ratings and CDS. The higher the CDS spread, the riskier the credit is deemed to be.
Russian CDS are higher than those of Indonesia, Brazil and Turkey, whose ratings, while investment grade, are lower.
"Russian CDS are extremely cheap compared to its ratings; that points to a move by the ratings agencies," said Ishitaa Sharma, an emerging markets strategist at Citi. "We think the agencies are going to do the catch-up now." Continuación...