Russia Liquidity Problems and Other Warning Signs

FXStreet is reporting Russia central bank lowers rate on currency swaps to stabilise short-term rates.

Russia's central bank lowered the interest rate on roubles used to carry out currency swap transactions to an annual 8 pct from 10 pct, effective today, in an effort to stabilise short-term rates on the currency market, Interfax reported.

The central bank also said the move should help regulate the liquidity of the banking system. Banks actively use currency swaps during unstable periods on currency markets and also when experiencing problems with liquidity.

More Foreign Warning Signs

Minyanville Professor Sally Limatour had these comments:

Today the Russian Central Bank revealed widespread liquidity problems for the banking system and announced a package of measures to prevent more trouble - lowering minimum reserve requirements and accepting credit as collateral.

The Kazah banks and companies are big borrowers to the tune of $70 billion or almost 70% of the countries GDP. The bank's 45 billion is about half their assets.

The central bank is lending 10% of the GDP to banks and short term rates are now up to 10% in the last two months.

Liquidity is tight in Moscow and banking problems are also appearing in Lithuania, Latvia and Azerbaijan as well as Romania and Hungary.

Is this important? Not sure, but I did not know the Thai Baht was important until it was. I am keeping an eye on it as the ramifications could roll on.

Do Foreign Warning Signs "Matter"?

Earlier this morning Todd Harrison was asking Do Foreign Warning Signs "Matter"?

I'll never forget the 1998 Russian Ruble crisis. I was sitting in a staff meeting at a multi-billion dollar hedge fund and offered, before the schvitz hit the fan, that the flag wasn't the only thing that was gonna bleed Red. My boss at the time - one of the best traders out there - shut me down quicker than my prom date. "Russia doesn't matter," he said, which a sharp look that made it very clear I shouldn't debate the subject.

Of course, it did matter and, while I would have rather profited than been proven right, it taught me the valuable lesson. A butterfly flapping its wings in Asia, as the Thai Baht did in 1997, could shift the wind patterns through Russia, Europe and eventually the United States.

Why am I talking about this? A little blurb I picked up in the FT about growing signs of trouble for Russia's banks. Will it matter? It didn't "matter" in Ecuador earlier this year. It didn't "matter " in the US during the subprime contagion and it didn't "matter" in Europe during the collateral fall-out. Why am I using quotation marks on either side of "matter?" Because "matter" is a relative term in a cumulative context.

Flashback September 28, 2007

Russian liquidity trouble starts to boil

A senior Russian banker warned on Wednesday of debt defaults as the liquidity squeeze in Russia tightened following the global credit crunch and interbank lending rates climbing to a two-year high. “If debt markets remain closed until the end of the year the situation is going to get very difficult for many banks,” said Oleg Vyugin, chairman of privately owned MDM Bank and former head of Russia’s financial markets regulator.

“There could be some defaults. The Russian rouble bond market is not working.”

Overnight lending rates in Russia climbed to 10 per cent, the highest since mid-2005, even after the central bank on Wednesday pumped an additional $2.56bn into the banking system via two one-day repo auctions.

“Banks are not lending to each other,” said Alexei Yu, a fixed income trader at Aton brokerage. “But it is largely due to internal reasons. Tax payments are falling due at the end of the month and at the end of the quarter, banks must bring their accounts in line with the regulations of the central bank. By the beginning of October, the situation will ease.”

My comments back in September were:

• I see "the situation [in Russia] will ease by the beginning of October".
• Since that is just two days away, I feel obliged to ask "What year?"

My comments today are:

• What year was that again?
• A quick look at the September Global Credit Wrapup shows foreign warning signs are brewing in many countries.
  
• The important question though as Todd suggests is "When will it matter?"

If the last month has proven anything it is this: No one knows when this will matter. Logic however, dictates that it will "matter" sometime.

The cumulative effects of competitive currency devaluations and unsound lending practices worldwide cannot be ignored forever. It sure would be ironic if a situation in Russia triggered a global credit crisis once again. Is a repeat of the demise of Long Term Capital Management waiting on deck? For more on this possibility please see Genius Fails Again.

Mike Shedlock / Mish