What happens if Russia defaults?

Well down the list of things to worry about as the ghastly Ukrainian tragedy unfolds is the high probability that the Russian government will stop paying its international debts. But this risk should certainly be somewhere on that list – as the fallout from past defaults has shown.

We have been here several times before. Moscow also defaulted on its debt in 1998, exacerbating a sell-off across all emerging markets. It led to the collapse of a huge US hedge fund, Long-Term Capital Management, which had to be bailed out to prevent a worldwide meltdown. This came too late to save many other investors from large losses. Ten years later, apparently isolated problems in the US mortgage market did cause a global financial crisis. For LTCM read Lehman Brothers, which was allowed to fail. If it hadn’t been Lehman’s, it might just have been someone else.

Rolling on to today, a Russian default is almost inevitable.