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Russia, Poland debt repayments turn tables with West

January 12, 2005 | Reuters

Nearly six years ago, the world's rich nations were busy bailing out Russia from the throes of a deep financial crisis.

In an ironic turn of events, it's now the turn of less prosperous countries like Russia and Poland to lend a helping hand by repaying debts to rich countries like Germany and France, which are grappling with budget deficit problems.

The Paris Club of creditor nations will meet on Thursday to discuss plans by Poland and Russia to buy back 12.3 billion euros ($16.3 billion) and $46.1 billion of debt respectively.

Germany, which has breached the three percent European Union budget deficit ceiling for three years in a row, has welcomed the moves to repay debt early. Analysts said the creditors' budget needs had fuelled the drive for debt repayment.

"It is partly motivated by the need of specific creditors for financing their budget deficits that privatisation revenues in those countries have been unable to deliver," said Alex Garrard, emerging market strategist at UBS.

Germany sold five billion euros' worth of Russian linked credit notes to private investors last year in a bid to plug a hole in its budget.

Poland had old trade debts to Germany of just over 2 billion euros at the end of 2003, while Russia owes about $20 billion to Berlin. German government sources have said Moscow could repay Berlin as much as $5-$6 billion in 2005.

While the amounts to be repaid may be small compared to market borrowings planned by Germany or France this year, analysts said additional inflows would always be welcome for governments struggling with bloated expenditure.

Ralf Preusser, eurozone bond strategist at Deutsche Bank, said the move to repay debt was positive for the German government, which has a hole to fill in its budget as it is likely to miss out unexpectedly on central bank profits.

Earlier this month, a member of the Bundesbank said its 2004 profits, which are booked by the government and had been factored into the 2005 budget to the tune of two billion euros, would be virtually nil.

"It is encouraging that some of these east European countries are making a lot of effort in bringing their deficits down," Preusser added.

DIFFERENT ROUTES

Garrard said different factors motivated Russia and Poland to pay down their Paris Club debt.

Poland has said from the beginning that it wants to smoothen the redemption profile of its foreign debt, making fiscal policy easier in the run-up to and after its planned eurozone entry.

"Poland is the last country within the European Union owing money to the Paris Club. A repayment will make its external debt market more liquid," said Christian Schiweck, director of emerging markets fixed income at DWS Investments in Frankfurt.

But unlike Russia, Poland does not have massive foreign exchange and fiscal reserves to pay back its debt and has opted instead to sell eurobonds.

Poland sold 3 billion euros worth of 15-year eurobonds on Tuesday at a spread of 27 basis points over mid-swaps.

On the other hand, high crude oil prices have helped Russia to pile up massive foreign exchange reserves and add billions of dollars to a rainy-day budget stabilisation fund. Moscow has said the cash for debt repayments will come from this fund.

Russia's gold and foreign exchange reserves stand at $120.7 billion, the largest outside Asia, and the stabilisation fund is forecast to exceed $20 billion.

Foreign portfolio investors have focused on Russia's strong economic fundamentals and cheap asset valuations while largely ignoring the government's push to force oil major YUKOS to pay a massive tax bill.

"Even if Russia was doing a transaction very similar to Poland, the fixed income investor community has more or less divorced elements at sovereign credit level from the rumpus surrounding YUKOS," Garrard said.



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