Warning: Tossing Russian Banks From the International System Could Backfire

The decision to boot Russian lenders from the global bank messaging system as punishment for its invasion of Ukraine is a very bad idea that could boomerang and hurt the West, Credit Suisse admonishes.

“Exclusions from SWIFT will lead to missed payments and giant overdrafts similar to the missed payments and giant overdrafts that we saw in March 2020,” wrote Credit Suisse strategist Zoltan Pozsar, in a research note.

This will lead to the Federal Reserve and other central banks reversing their plans to feed liquidity into the system via bond purchases, Pozsar predicted. No one else will be able to clean up the mess, he argued.

The U.S., the European Union and Canada agreed over the weekend to oust Russian banks from the interbank system, called SWIFT, a remarkable move that will end Russia’s connection from much of the world’s financial system.

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Concern is rife on Wall Street that such an extraordinary step—reserved in the past for only Iran—will backfire on the West. S&P 500 futures, which had climbed Friday as the market bounced back from earlier worries, were down 2.2% Sunday as a result.

SWIFT, which stands for the Society for Worldwide Interbank Financial Telecommunication, is an independent organization that facilitates international payments by linking more than 11,000 banks and other financial players in over 200 countries and territories.

“Exclusions from SWIFT will lead to missed payments everywhere,” Pozsar wrote. Two years ago, “the virus froze the flow of goods and services that led to missed payments.” Aside from the financial panic at the outset of the pandemic, the world ran into a similar problem in 2008, when Lehman Brothers collapsed, he said.

Pozsar wrote: “Banks’ inability to make payments due to their exclusion from SWIFT is the same as Lehman’s inability to make payments due to its clearing bank’s unwillingness to send payments on its behalf. History does not repeat itself, but it rhymes.”

To Pozsar, commercial banks’ current excess reserves and reverse repurchase agreement facilities won’t be sufficient to deal with the problem, and central banks will be forced to step in. And the upshot from that is that the Fed, which has been tapering its bond-buying program with the view of ending it in a few months, might actually need to about-face and expand the purchases again, Pozsar said.

“The consequence of excluding banks from SWIFT is real,” he added, “and so is the need for central banks to reactivate daily U.S. dollar funds supplying operations.”

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Tags: Canada, Credit Suisse, European Union, Federal Reserve, Lehman Brothers, Pandemic, Russian banks, SWIFT, US, Zoltan Pozsar

Despite investment losses in January, the funded status of the 100 largest corporate defined benefit pension plans improved by $27 billion during the month, according to consulting firm Milliman. The improvement boosted the funded ratio for the Milliman 100 Pension Funding Index plans to 101.4% as of the end of January from 99.8% at the end of December. It is the highest funded ratio for the plans in more than 13 years.

The plans moved into the black during the month with a $24 billion funding surplus at the end of January. An increase in the benchmark corporate bond interest rates used to value pension liabilities led to an $82 billion liability improvement, which offset the $54 billion drop in asset values that resulted from January’s market downturn.

As a result, the Milliman 100 plans had a funded status surplus of $24 billion by the end of the month.

“The discount rate climbed above 3% for the first time in nearly a year, lifting pension funding despite the market slide,” Zorast Wadia, author of the Milliman 100 PFI, said in a statement. “With the Fed likely to raise interest rates in Q1, we could see further liability decreases for these plans.”

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January’s 2.62% investment loss was the largest in more than a year. The asset value of the plans in the Milliman 100 PFI decreased to $1.792 trillion as of Jan. 31, from $1.846 trillion as of December. The monthly median expected investment return during 2020 was 0.50%, or 6.2% on an annualized basis.

The projected benefit obligation, also known as pension liabilities, decreased to $1.767 trillion at the end of January, which was the result of a 32 basis point increase in the monthly discount rate to 3.12% from 2.80% a month earlier.

Over the last 12 months ending in January, the cumulative asset return for the pensions has been 6.22%, and the Milliman 100 PFI funded status deficit has improved by $181 billion. Milliman said the funded status improvement was spurred by investment gains and discount rate increases during the year as the funded ratio for the companies jumped by nearly 10% during that time.

Milliman said that the if the 100 companies in its index were to earn the expected 6.2% median asset return per its 2021 PFS study, and if the current discount rate of 3.12% holds steady through 2023, the funded ratio of the plans will rise to 104.4% by the end of 2022, for a projected surplus of $135 billion, and to 107.8% by the end of 2023. The firm said the forecast assumes 2022 and 2023 aggregate annual contributions of $28 billion.

Under an optimistic forecast in which interest rates rise to 3.67% by the end of 2022 and 4.27% by the end of 2023, with asset gains providing 10.2% annual returns, the funded ratio would climb to 116% by the end of 2022 and 134% by the end of 2023. However, under a pessimistic forecast in which the discount rate drops to 2.57% by the end of 2022 and 1.97% by the end of 2023, with annual returns of 2.2%, the firm said the funded ratio would fall to 93% by the end of 2022, and 85% by the end of 2023.

Milliman also reported that the aggregate funded percentage of all multiemployer plans in the US climbed to 91% at the end of 2021 from 88% the previous year.

The firm said that despite increased pension liabilities due to falling discount rates, multiemployer pension funding rose thanks to strong investment returns. As of the end of 2021, more than half of all plans it studied were fully funded or better, and 80% of plans had a funded ratio of at least 80%. Approximately 10% of plans are under 60% funded, and Milliman said many are likely to apply for special financing assistance provided by the American Rescue Plan Act of 2021.