Ukraine swaps signal 90% chance of default as Russia attacks

[LONDON] Signs of distress in Ukraine's debt markets deepened after Russia attacked, with credit-default swaps signalling about 90 per cent probability of default within 5 years. The contracts surged to the highest since the country restructured its obligations in 2015, according to data compiled by ICE Data Services.

Trading activity is low, and they are no longer being quoted in basis points, which is how the market usually prices risk, although at more than 3,000 basis points they do signify traders' anxiety over Ukraine's debt.

Instead, protection sellers are demanding payment in advance, which is what typically happens when contracts exceed 1,000 basis points and they perceive an imminent risk of default. So contracts insuring US$10 million of the country's bonds for 5 years were quoted at about US$6 million upfront and US$100,000 annually, signalling around 90 per cent likelihood of default, according to data compiled by ICE. The so-called swap curve also inverted, with the cost of short-term default insurance rising above longer-term protection, ICE data show.

Russian military vehicles are now in the northern region that includes Ukraine's capital, officials there said, after tanks were reported rolling in from Crimea to the south. The government in Kyiv declared martial law and pleaded for international support including harsher sanctions, with President Volodymyr Zelenskiy calling on citizens to take up arms.

"Uncertainty is huge, and the situation can change every second," said Jochen Felsenheimer, a managing director at XAIA Investment in Munich who trades credit default swaps and bonds. "This is reflected in the huge bid-offer price spreads."

Ukraine's US$2.6 billion of bonds due in March 2033 fell to a record 35 cents on the dollar from 88 cents at the beginning of the year, according to data compiled by Bloomberg. The country has about US$23 billion of international debt outstanding, including about US$2.2 billion set to mature within the next year, the data show.

Meanwhile, the cost of insuring Russia's government bonds surged on Thursday (Feb 24) to the highest since at least 2009, signalling a 45 per cent chance of default within 5 years, ICE data show. Traders also started quoting those contracts upfront and Russia's swap curve inverted, according to ICE.

The sell-off also spread to corporate default swaps, with benchmark indexes in Europe soaring to the highest levels in more than 20 months. BLOOMBERG