Sorry To Hear About Your Junk, Vlad. That's Gotta Hurt

by: Craig Pirrong

Today, S&P downgraded Russia's foreign currency bond rating to below investment grade, i.e., junk. (Just what did you think I was referring to?) This really isn't surprising. Russian bonds and CDS have been trading at junk levels for some time. The implied annual probability of default is 7.4 percent, which trails only Venezuela (20 percent), Argentina (19 percent), and Ukraine (17 percent). Nice company.

But that's the way credit rating agencies are. They are like the forensic investigator drawing a chalk outline around a body, just documenting what already happened.

Nonetheless, the ruble bounced again today, down around 7 percent. The downgrade probably contributed, but another ruble bond issue by Rosneft no doubt contributed as well. As did news that another mid-sized bank (ranked 80th by assets in Russia) has suspended withdrawals. Yet, additional recapitalization of the banking sector is likely necessary.

The hits keep on coming. And to VVP, they all seem to be below the belt.