Euro Falls as Russian Banks Seek Government Role in Debt Talks

By Ron Harui and Yasuhiko Seki

Feb. 10 (Bloomberg) -- The euro fell against the dollar and the yen after Russian banks asked the government to moderate talks with foreign creditors on $400 billion of loans, adding to speculation financial turmoil in Europe is worsening.

The yen also rose for the first time in four days versus the euro after European finance ministers signaled increasing concern some governments are finding it harder to borrow in financial markets, and after UBS AG reported a larger-than- forecast quarterly loss. The dollar strengthened on optimism U.S. President Barack Obama’s stimulus and bank-rescue packages will spur growth in the world’s largest economy.

“European banks may face more financial difficulties” given news “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. “This is likely to cause risk aversion. It is natural that the euro is sold and the yen is bought.”

The euro fell 0.9 percent to $1.2889 as of 7:40 a.m. in London from $1.3003 late in New York yesterday. Europe’s single currency slipped 1 percent to 117.78 yen. The dollar was at 91.39 yen from 91.46 yen. The euro may weaken to $1.27 and 117 yen, and the dollar may depreciate to 90 yen today, Saito said.

The British pound climbed to 86.83 pence per euro from 87.28 pence yesterday. The yen advanced 1.2 percent to 61.33 versus Australia’s dollar and 0.7 percent to 48.91 against New Zealand’s dollar.

‘Bigger Exposure’

The euro fell versus 13 of the 16 most-active currencies after Anatoly Aksakov, president of the Russian Association of Regional Banks, said in an interview with Bloomberg News that the group has written to the government after talking with foreign banks. He said $135 billion of the loans are due this year and the remainder of the $400 billion within four years.

The Russian government isn’t planning to restructure corporate foreign debt, and isn’t in talks with foreign banks on restructuring, a Finance Ministry official said by telephone today, declining to be named.

“European financial institutions have a bigger exposure to Russia than their counterparts in other countries,” said Takashi Kudo, director of foreign-exchange sales in Tokyo at NTT SmartTrade Inc., a unit of Nippon Telegraph & Telephone Corp., Japan’s largest fixed-line telephone 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.

‘Worrying’

The widening spreads between the interest rates that 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.

European Central Bank council member Axel Weber said in Kuala Lumpur today that central banks worldwide must focus on the medium and long term even as they respond to the global financial crisis.

UBS, Switzerland’s largest bank, said today it made 8.1 billion Swiss francs ($6.92 billion) in trading losses and leveraged loan impairments, and said it plans to cut more investment banking jobs this year.

The yen also strengthened after Asian stocks fell, reversing an advance, according to BNP Paribas SA, France’s largest bank.

“The failure of Asian equity markets to hold onto this morning’s gains supported the views of risk-averse investors, and in turn, provided support to the yen,” analysts led by Hans-Guenter Redeker, London-based global head of currency strategy at BNP Paribas, wrote in a research note sent in an e- mail to Bloomberg News today.

Higher Volatility

The Nikkei 225 Stock Average declined 0.3 percent after earlier 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, climbed 0.6 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 market moves can erase profits.

The dollar also strengthened versus 15 of the 16 major currencies on optimism U.S. fiscal-stimulus and bank-rescue packages will help the economy recover faster than countries in Asia and Europe.

Stimulus Plans

U.S. President Obama is demanding an economic stimulus bill on his desk before Congress leaves for the Presidents’ Day holiday on Feb. 16. The Senate voted 61 to 36 yesterday to end debate on the $838 billion measure. Senators will vote today on whether to approve the bill. Treasury Secretary Timothy Geithner’s announcement of a financial-rescue plan is also planned for today.

“There is an emerging view that the worst phase of the financial-system meltdown is over” in the U.S., said Ryohei Muramatsu, manager of Group Treasury Asia in Tokyo at Commerzbank AG, Germany’s second-biggest lender. “Investor sentiment toward the dollar has already changed to favor the currency.”

The ICE’s Dollar Index, which tracks the greenback versus the euro, the yen, the pound, the Canadian dollar, the Swedish krona and the Swiss franc, rose 0.8 percent to 85.444.

To contact the reporters on this story: Ron Harui in Singapore at rharui@bloomberg.net; Yasuhiko Seki in Tokyo at yseki5@bloomberg.net.