Holy Roman Empire - Chapter 450
Chapter 450: Chapter 23, Stirring the Water to Catch Fish
The Russian-Austrian negotiations have already begun. Alexander II is not a reckless man; the main reason for defaulting is a lack of funds, which does not mean he is unaware of the consequences of losing credibility.
Even if there is an intention to default, it must be done with the least possible impact, for the Tsarist Government will have to rebuild its credibility one day in the future.
The more negative the impact now, the harder it will be to make amends in the future. The Russian Empire still needs to export grain, so relations with the countries of Europe cannot be entirely ruined.
Otherwise, even if grain is sold at rock-bottom prices in the future, no one will want it. It will be tragic, as an excess grain production capacity can also lead to an economic crisis.
Relying solely on Russia’s domestic market is not enough to maintain an economic cycle. The era of isolationism has ended since the Industrial Revolution began.
Austria is not only Russia’s largest creditor and an occasional ally, but also the most important link in Russia’s international relations.
If they can’t even manage Austria, there’s no point in proceeding with the rest. Russia will have no business in future activities on the European Continent.
In this era, many still consider Russia an Asian country, after all, the division of the seven continents is man-made, and the boundary between Asia and Europe is not yet universally recognized.
Most of Russia’s territory lies in Asia; even its European part is just slightly over one-quarter. Saying they are an Asian country is not entirely incorrect.
Of course, the Russians would not admit they are an Asian nation, not even Franz. If territories were divided based on land mass, he would have to be labeled as “non-African.” The term itself is quite unpleasant, so determining the continent a country belongs to based on its capital is a scientific method. One could never divide based on the main land area.
In the Vienna Foreign Ministry, Wessenberg issued a notice to the Russian Envoy to discuss France and Austria’s debt issues.
“Mr. Sores, Your country’s sudden declaration of bankruptcy seems a bit extreme! As far as I know, your country’s finances are difficult, but not to the point of immediate bankruptcy.”
Indeed, it wasn’t to the point of immediate bankruptcy, but within a few months, it would be. Following the civil war, the debts the Tsarist Government had to pay each year had already exceeded half of the current financial income.
In such circumstances, defaulting was inevitable. Of course, if the Tsarist bureaucratic group suddenly became honest and upright, perhaps this gaping hole could be filled.
Clearly, this was impossible. In this era, bureaucrats in government around the world were not so incorruptible, and the so-called good governance was only relative.
Compared to Russians, European bureaucrats were considered honest. It’s not that they were less corrupt; they had simply evolved, knowing what money could be taken and what should not be touched.
Fools who would rather have money than life were few and far between. With supervisory institutions in almost every European country, bureaucrats who were constrained naturally performed better than those without any checks.
Envoy Sores admitted to the hardship with composure, “Your Excellency, the Minister, you are not aware of our struggles. The continuous wars year by year have caused a devastating blow to our domestic economy.
Not to hide the fact from you, this year’s financial revenue is probably less than 200 million rubles, a return to the state of twenty years ago.
However, the debts that need to be repaid annually amount to as much as 120 million rubles, and the remaining funds are nowhere near enough to maintain government operations.
Since the Prusso-Russian war broke out, our annual fiscal deficit has exceeded the financial income, here are the detailed documents for Your Excellency to review.”
Looking at the thick files, Wessenberg did not reach out to take them. These were open secrets; the Vienna Government was well aware of how terrible the Tsarist Government’s finances were.
The current financial income being less than 200 million rubles was expected. With so much territory lost and the Moscow area ravaged, it would be problematic if the financial revenue did not decrease.
“Mr. Sores, today we are not here to discuss your country’s financial issues. You should bring this issue to your country’s Ministry of Finance, who are responsible.
Our meeting today is solely to discuss the debt issues between the two countries. Paying debts is a practice approved by God, and your country must give a clear response.”
Failing to shift the topic, Sores was not discouraged. Bluffing could win a moment, but not a lifetime. Such a large debt could not be resolved simply by talking.
“I am sorry, Your Excellency, the Minister. With our current financial condition, we are unable to continue servicing the debt, and we request a postponement of payment.
This period is tentatively set for five years, and at the same time, we hope to waive the loan interest and the penalties for default. Otherwise, in five years, we will still be unable to repay.”
Repayment of principal without interest meant that the total amount of debt between Russia and Austria was directly halved, and the actual amount the Russians needed to pay was reduced to less than one-third of the original.
This was clearly beyond the Vienna Government’s bottom line, and honoring the agreement on these terms would mean the Vienna Government would be paying for Russia’s mistakes.
Wessenberg shook his head solemnly, “I’m sorry, Envoy, we cannot accept this condition.
Your government received many loans for which we provided guarantees, or else you could not have obtained the loans at such low interest rates.
Now that you are defaulting, we are obliged to assume this debt, and as an ally, we cannot be so exploitative.
We demand execution according to the agreement, but we can discuss a deferment of the loan payment. The interest rates we provided on the loans were already favorable, and cannot be further reduced.”
No one does business at a loss; naturally, the Vienna Government could not be the gullible party. It was due to harsh reality that the Tsarist Government declared bankruptcy without concern for reputation. Austria, however, could not dare to follow suit.
…
The negotiation continues in a stalemate, with both sides trying to gain more advantages. This news is not a good sign for the financial world of Austria.
Especially for securities companies that undertook Russia’s bonds privately and banks that provided loans to Russians. These kinds of private international debts are always the hardest to collect.
Compared to commercial loans, the security of sovereign debt was actually supposed to be the highest, with countries seldom defaulting under normal circumstances.
Unfortunately, they faced Russians. If it were a small country, even in the event of default, they would at most announce a suspension of payment and then come forward to negotiate a postponement of the debt.
Now, tragically, the Russian representatives were nowhere to be seen. If not for the Tsarist Government’s recognition of the debt, they might even doubt whether they had been swindled.
Recognition was recognition, but no money meant no money. No one offered any answer as to when the debt would be repaid.
Their only hope was the ongoing Russian-Austrian negotiations. If the Vienna Government couldn’t settle things with the Russians, then the debt would become everyone’s bad debt.
Which financier doesn’t hold some bad debts? If it weren’t for the strict regulation by the Vienna Government, they would have long dumped the losses onto private investors and started anew under a different name.
Unfortunately, Austrian law is too stringent. Even if they escaped punishment, the law has a regulation: any financial institution that goes bankrupt, all its management and shareholders, for three generations, are forbidden from engaging in similar business.
This posed a significant restriction on the financial titans; the trick of shedding one’s shell and escaping was futile. When speculating, one had to consider the risks, as hiding behind the scenes might also bring potential entanglement should issues arise.
Otherwise, from the moment Russia declared debt default, there should have been a bankruptcy wave among Austrian financial institutions.
As of now, due to Russia’s debt default, more than a hundred financial institutions on the European Continent have declared bankruptcy, while Austria’s financial industry is still desperately holding on.
Considering long-term interests, every capitalist who could survive would not want to bow out at this time.
Philipote was just one of them. After much running around, he still hadn’t received the answer he wanted.
High profits always come with high risks. To reduce risks, it’s simple: during bond sales, don’t make promises of principal protection, and clearly inform investors of the risks.
Bond issuance isn’t based on credit, but on collateral. As long as there is strict vetting, even if there is a problem with the debt, it’s impossible to lose everything.
Groggy, he returned to his office and sat down to smoke. His mind had already begun to calculate whether he needed to raise funds from elsewhere to fill this hole.
With the high commission and the default payment for early redemption taken into account, along with company operating costs and taxes, the loss amounted to roughly 5.6 million Divine Shield.
As for the company operating costs and taxes, the commissions initially earned had already been offset by the profits generated in the financial market.
If one were to calculate comprehensively, the loss from this business transaction might even be less, or else the financial industry wouldn’t be dubbed as a hugely profitable sector.
Even if all bondholders required early redemption, the funds that would need to be disbursed now would only be about 6.6 or 6.7 million Divine Shield.
Company project funds could solve half of it, and selling off some long-term held stocks and bonds could raise another 1.5 million Divine Shield.
Selling a few mansions owned under his name could bring in another four or five hundred thousand Divine Shield, leaving a shortfall of only about 1 million Divine Shield.
As long as the company survived, all this money could be earned back. After all, Philipote’s securities company wasn’t operating in isolation; it also held shares in a bank.
The profits Philipote drew from the company were partly spent on personal consumption, but a large portion was invested in other areas, the bank being one of them.
Even at this moment, he had no intention of selling his bank shares. Without the identity of a bank shareholder, it would be difficult for the securities company to raise funds.
Just as he was contemplating how to raise funds, a familiar voice came from outside the door.
“Mr. Philipote, good news, good news!”
Philipote feigned composure and said, “Alfa, slow down, no need to get excited.”
The young man, Alfa, gasped, “I’ve just received news, Wealth Securities is buying Russian bonds in the market.
It’s just that the price is a bit low, they are only willing to pay two layers of the face value, which is even lower than the current market value, and they have also specified that they will only buy the exclusive bonds issued by Russians to Austria.”
After the Tsarist Government announced its default, the value of Russian bonds plummeted. They didn’t immediately become worthless since Russia could still possibly make the payment, but the hope was slim.
There was a value, but unfortunately, there was no market. Regardless of the price, nobody in the market dared to buy. No one believed they had the capability to demand debts from Russia.
What Wealth Securities did was undoubtedly a tonic for the market. However, this was of little concern to Philipote; buying back Russian bonds was risky enough, and trying to buy bonds from the market to profit from the price difference was out of the question.
Such high-risk opportunities are only played by the big sharks. As a small pawn in the capital market, it’s better not to join the fray.
“Get in touch with them immediately, we have a large amount of bonds in our hands, ask them if they want it. As long as they might offer half the value, not a quarter, I’ll sell to them!”
This was a probe. Compared to the financial magnates, Philipote’s information wasn’t as insightful.
Whether it was smoke and mirrors from Wealth Securities or a real turn of events was an unknown.
After all, the number of bonds held by large institutions was far greater than theirs. And the financial institutions forced to buy back bonds prematurely weren’t just one or two.
To stabilize public sentiment, purposely releasing a message was entirely possible. Not only Philipote had doubts, but many Austrian financial institutions did too.
The deadlock in the Russian-Austrian negotiations was an open secret, with most financial circles closely following the progress of the talks.
Getting the details was not hard; obtaining messages from the Vienna Foreign Ministry might be difficult, but getting clarity on the negotiation progress from the Russians was merely a matter of money.
However, the authenticity of the news couldn’t be judged. Normally, the credibility of Russian bureaucrats was quite good; taking money to get a job done was their professional ethic.
If things couldn’t be done, there might even be a refund, which many had experienced.
But this situation was different, the problems involved too large. If someone offered a high price for them to put on an act, it wasn’t impossible either.
The most reliable way was to seek confirmation from the Foreign Minister himself, but no one dare to do such a foolish act. It was a life-threatening move; the dignity of the Vienna Government was not to be challenged, and peering into state secrets was a death sentence.
Testing Wealth Securities became the only choice; if negotiations had made progress, then everyone holding a large amount of Russian bonds would make a fortune, otherwise, it was no worse than the status quo.
