The Republic of Italy is to sell all the Paris Club debt that Russia owes it, totalling around Eu1bn, to the Italian credit export agency Sace, to reduce the country's public debt.
According to a research note from Michael Marrese, head of economic research and sovereign strategy for emerging Europe, Russia and Turkey at JP Morgan, the likely rationale behind the announcement is a desire to monetise the debt without alienating Russia's government.
“This sale enables the Italian government to receive an up-front payment for its credits to Russia, without engaging in an Aries-type transaction,” he said.
Russian finance officials were said to have been displeased with the scale of Germany's Aries securitisation of Russian Paris Club debt in July. At Eu5bn, it pushed the Russian corporate yield curve wider and made it more expensive for some of the country's borrowers to issue.
Deutsche Bank and Goldman Sachs sold Eu5bn of Eurobonds credit-linked to Soviet-era Paris Club debt owed to Germany by the Russian Federation at the beginning of July, through special purpose vehicle Aries Verm-ögensverwaltungs GmbH.
At the time, Germany said it had Russia's consent, but it subsequently emerged that the Federation was surprised by the scale of the transaction.
“Once this transaction is completed, Sace will be able to sell this Eu1bn of Russia's Paris Club debt to anyone,” said Marrese. “However, we believe that Sace will sell this credit to the Russian government some time in 2005, bowing to the Italian government's wish to avoid alienating the Russian government. In order for Sace SpA to sell this credit to Russia, we believe that the Paris Club first needs to change rules whereby a Paris Club creditor may sell debt back to the debtor at a discount to face value.”
Russia has been looking at ways to prevent further large amounts of its Paris Club debt being sold into the bond market and hurting its sovereign and corporate trading spreads. Finance minister Alexei Kudrin plans to use part of the country's growing oil stabilisation funds to pay back some of the debt early.