Stranger Things: Part 2

► We are possibly living in the financial equivalent of the Marvel Universe; it looks unrealistic but has an aura of authenticity. For instance, reserves are at minus USD 48bn, but whatever swap money there is and any foreign currencies that exporters hand into the state are being continually sold.

► Under normal circumstances, everybody would expect the state to build up its reserves instead of giving away foreign currencies that are either hard-won or borrowed. Had this been done over the last 5 months, the CBRT would post positive net reserves today.

► Because the Fed won’t shy away from tightening, all financial markets are busy reorienting themselves. Adding insult to injury, Christine Lagarde has declared that interest rate hikes in the euro area will begin “weeks after” the ECB is done with the asset purchase program.

► This means that we will see the first euro interest rate increase on July 21-22, when the ECB monetary policy committee will convene. Everybody is raising their policy rate everywhere. The ECB is notorious for its slow decision-making process, but even in the euro area, they have decided to raise interest rates to fight inflation.

► However, such a move is unimaginable here. Instead, all government debt issuances are being tilted towards CPI-linkers and floating-rate notes, not to mention domestically issued FX-denominated securities.

► Therefore the effective interest rate paid by the Treasury is still climbing. What would a CPI-linker pay given that we stand at 70% CPI today? The CBRT is funding banks at 14% but the benchmark 2-year bond pays 23%. The spread is wide open and implies an instantaneous gain of 9% for banks.

► This is only the beginning of the story, though. The composition of domestic debt has been changing lately. Now CPI-linkers, floating-rate notes and gold and FX-denominated securities account for 75% of the stock.

► This means the effective nominal interest to be paid is much higher than the 23% benchmark rate. How much do the c. 22% and rising CPI-linkers pay on average? 50%?