Russia: Repackaging of Paris Club Debt to Germany

The German government surprised the market on June 24, 2004 by unveiling plans to
repackage up to ?5 billion in Russian Paris Club debt into new “Aries” Credit-Linked Notes (CLNs).
The market’s reaction has been negative, with concern that the issue will boost supply and
cannibalize the existing eurobond curve. Since the announcement the Russian eurobond curve has
widened out by around 30 bps, with most of this reflecting unease over the new German deal.
Concern is not limited to Russia, as there is fear that the Aries deal will set a precedent that other
Paris Club creditors may follow. If this proves to be the case, the net impact would be a surge in
supply of new emerging market debt, with an obvious impact on debt financing costs for emerging
market borrowers. Official creditors, with the exception of the German government, have however
been remarkably silent since the announcement of the deal. Our investigations suggest that the
German deal has in fact taken other Paris Club members by surprise suggesting that it may not in
fact prove to be a landmark deal in terms of reshaping Emerging Debt Markets.