Euro Weakens on Nikkei Report Russian Banks to Reschedule Debt

By Ron Harui and Yasuhiko Seki

Feb. 10 (Bloomberg) -- The euro fell, halting a three-day gain against the yen, after the Nikkei newspaper reported that Russian banks and businesses may ask foreign lenders to reschedule loans worth $400 billion.

The yen gained for a second day versus the dollar on speculation the financial turmoil in Europe is worsening, prompting investors to sell higher-yielding assets. The 16-nation euro also dropped against the dollar after European finance ministers signaled increasing concern that some governments are finding it harder to borrow in financial markets.

“European banks may face more financial difficulties, given the Nikkei’s report that Russian banks may negotiate a debt rescheduling,” said Yuji Saito, head of the foreign-exchange group in Tokyo at Societe Generale SA, France’s third-largest bank by market value. “It is natural that the euro is sold and the yen is bought.” 

The euro declined 1.3 percent to 117.36 yen as of 10:30 a.m. in Tokyo from late in New York yesterday. It also dropped 1.1 percent to $1.2857 from $1.3003. The dollar fell to 91.29 yen from 91.46 yen. Europe’s single currency may weaken to $1.27 and 117 yen and the dollar may depreciate to 90 yen today, Saito said.
Against the euro, the British pound climbed to 86.67 pence from 87.28 pence. The pound declined to $1.4837 from $1.4898. The yen advanced 1.4 percent to 61.20 versus Australia’s dollar and 1.3 percent to 48.61 against New Zealand’s dollar from late in New York yesterday.

‘Driving Euro Lower’ 

The euro weakened versus 12 of the 16 most-active currencies as the Russian Association of Regional Banks has submitted a plan for rescheduling loans to the Russian government, the Nikkei newspaper said, citing an interview with Anatoly Aksakov, the head of the association. The group is already in talks with HSBC Holdings Plc and Deutsche Bank AG, the Nikkei reported.

“The Nikkei report of rescheduling debt is driving the euro lower because European financial institutions have bigger exposure to Russia than their counterparts in other countries,” said Takashi Kudo, director in Tokyo at NTT Smarttrade, the foreign-exchange unit of Nippon Telegraph & Telephone Corp., Japan’s largest fixed-line phone company.

Kazakhstan’s banks may have their ratings cut as the devaluation of the nation’s currency makes it harder for them to repay foreign debt and “substantially increases” credit risk, Moody’s Investors Service said yesterday.
The widening spreads between the interest rates different euro-area nations must pay bond investors are “worrying developments,” according to a “speaking note” prepared for Luxembourg Finance Minister Jean-Claude Juncker and obtained by Bloomberg News.

VIX Volatility 

The Nikkei 225 Stock Average pared its advance to 0.2 percent after gaining as much as 2 percent. The VIX volatility index, a Chicago Board Options Exchange gauge reflecting expectations for stock-market price changes that is used as a measure of risk aversion, rose 0.62 percent to 43.64 yesterday.

Benchmark interest rates are 3.25 percent in Australia and 3.50 percent in New Zealand, compared with 0.1 percent in Japan, encouraging investors to borrow in yen and buy higher-yielding assets elsewhere.
In these so-called carry trades, investors get funds in a country with low borrowing costs and invest in one with higher rates. The risk is that market moves can erase those profits.


To contact the reporters on this story: Ron Harui in Singapore at rharui@bloomberg.net; Yasuhiko Seki in Tokyo at yseki5@bloomberg.net
Last Updated: February 9, 2009 20:49 EST