Holy Roman Empire

Chapter 450: Fishing in Troubled Waters

The negotiations between Russia and Austria have already begun. Alexander II is not a reckless person; defaulting on debts is mainly due to a lack of funds, but he understands the consequences of losing credibility.

Even if they have to default, the impact must be minimized as much as possible because one day the Russian government will need to rebuild its credibility.

The worse the current impact, the harder it will be to restore their reputation in the future. The Russian Empire still needs to export its grain, so it cannot completely sour its relations with European countries.

Otherwise, even if they offer grain at rock-bottom prices, no one will want it. That would be disastrous, as overproduction of grain can also lead to an economic crisis.

The Russian Empire’s market alone cannot sustain an economic cycle. The era of self-sufficiency had already ended since the Industrial Revolution.

Austria is not only Russia’s biggest creditor and occasional ally but also the most crucial link in Russia’s foreign relations.

If they can’t appease Austria, there’s no point in attempting to address other issues. Russia would essentially be sidelined in European affairs.

In this era, many still consider Russia an Asian country. After all, the continents are human constructs, and the division between Europe and Asia is not universally agreed upon.

Most of the Russian Empire’s territory is in Asia, with just over a quarter in Europe, so calling it an Asian country isn’t entirely inaccurate.

Of course, the Russians would never admit to being an Asian country, and even Franz would deny it. If countries were classified by the location of their land area, they would be considered “African.”

Just the name itself is already very unpleasant, so it is more scientific to classify which continent a country belongs to based on the location of its capital. It is absolutely not appropriate to classify it based on the location of the majority of its territory.

At the Austrian Foreign Ministry, Wessenberg summoned the Russian envoy to discuss the Russo-Austrian debt issue.

“Mr. Sorev, your country’s sudden announcement of financial bankruptcy seems rather excessive! As far as I know, your country’s finances, though difficult, have not yet reached the point of immediate bankruptcy.”

Indeed, it has not reached the point of immediate bankruptcy, but it will be in a few months. After the civil war ended, the Russian government had to pay debts amounting to more than half of its current financial revenue each year.

In this situation, defaulting on debts was inevitable. Of course, if the Russian bureaucracy suddenly became honest and incorruptible, they might be able to fill this gap.

Obviously, that’s impossible. In this era, the bureaucracies of all countries were not that clean, and so-called “good governance” was only relative.

Compared to the Russians, the bureaucrats in European countries were considered clean. It doesn’t mean they took fewer bribes, but they had evolved to know which money they could take and which they could not.

Few fools wanted money at the cost of their lives. Most European countries had supervisory agencies, and bureaucrats under such supervision naturally behaved better than those without such constraints.

Envoy Sorev very frankly pleaded poverty, “Minister, you don’t understand our hardships. Continuous wars have brought devastating blows to our domestic economy.

To be honest, this year’s financial revenue may not even reach 200 million rubles, taking us back twenty years.

However, the annual debt repayment is as high as 120 million rubles, and the remaining money is simply not enough to keep the government running.

From the outbreak of the Russo-Prussian War until now, our annual financial deficit has exceeded our revenue. Here are the detailed documents for your reference, Minister.”

Looking at the thick stack of documents, Wessenberg did not reach out to take them. These were all open secrets; the Austrian government was fully aware of how dire the Russian government’s financial situation was.

It was entirely normal for the current financial revenue to be less than 200 million rubles. Losing so much territory and devastating the Moscow area, it would be surprising if the revenue did not decrease.

“Mr. Sorev, we are not here today to discuss your country’s financial problems. You should raise those with your Ministry of Finance, as they are the ones responsible.

The purpose of our meeting today is solely to discuss the debt issue between our two countries. Repaying debts is endorsed by God; your country must give a clear response.”

Failing to steer the conversation off-topic, Sorev was not disheartened. Dodging the issue temporarily was not a long-term solution. Such a large debt could not be resolved with mere words.

“I’m very sorry, Minister. Given our current financial situation, we are unable to continue fulfilling our debt obligations. We request a deferment of five years. During this period, we hope to have the loan interest and default penalties waived. Otherwise, we won’t be able to repay even after five years.”

Paying only the principal and not the interest would cut the total debt between Russia and Austria in half, reducing the actual payment required by the Russians to less than one-third of the original amount.

This clearly exceeded the Austrian government’s bottom line. Complying with such terms would mean Vienna would have to compensate for the Russians’ shortfall.

Wessenberg shook his head and said sternly, "Sorry, we cannot accept these terms. Many of your government’s loans were guaranteed by us. Otherwise, you wouldn’t have been able to secure them at such low interest rates.

Now that you are defaulting, we have to assume this debt, and as allies, you can’t leave us in the lurch like this. We insist on adhering to the contractual terms. We can discuss extending the repayment period, but we cannot further reduce the already favorable loan interest rates we provided.”

No one wants to engage in a losing deal, and the Austrian government certainly does not want to be taken advantage of. The Russian government, forced by circumstances, might have abandoned its creditworthiness by declaring bankruptcy, but Austria cannot afford to lose credibility too.

…

Negotiations remained at a standstill, with both sides trying to secure more favorable terms. This news was not welcomed by Austria’s financial sector, especially for the securities companies that privately underwrote Russian bonds and the banks that extended loans to the Russians. International private debt has always been the hardest to collect.

Generally, compared to commercial loans, government bonds are considered the safest, as countries rarely default. Unfortunately, dealing with the Russians proved problematic. If it were a smaller country, they might just announce a suspension of payments and then come forward to negotiate a debt extension.

The current situation was dire; the Russian representatives were now nowhere to be found. If the Russian government hadn’t acknowledged the existence of this debt, the creditors might have suspected fraud.

Acknowledgment aside, they still had no money. No one could provide a clear answer on when the debt would be repaid.

Their only hope was the ongoing Austro-Russian negotiations. If the Austrian government couldn’t come to a settlement with the Russians, the debt would become a lost cause for everyone.

Anyone in finance likely has a few bad debts. If not for Austria’s stringent regulations, they would have shifted the losses onto private investors and reopened under a new name.

Unfortunately, Austrian laws are very strict. Even if they avoided punishment, the law also stipulates that after the bankruptcy of any financial institution, all management and shareholders are barred from similar businesses for three generations.

This severely restricts financial magnates. The usual tactic of shedding liabilities and starting anew was no longer viable. When speculating, they now had to consider the risks, as any issue could implicate even those hiding in the background.

Otherwise, from the moment Russia announced its debt default, there would have been a wave of bankruptcies among Austrian financial institutions.

So far, due to Russia’s debt default, more than a hundred financial institutions across the European continent have declared bankruptcy, while Austria’s financial industry is still struggling to hold on.

For the sake of long-term interests, capitalists, if they can hold out, are unwilling to exit the market at this point.

Philippot was just one of them. After running around for answers, he still didn’t get the result he wanted.

High profits always come with high risks. If you want to reduce risks, it’s simple: when selling bonds, don’t promise guaranteed returns and clearly inform investors of the risks.

Issuing bonds is not about relying on reputation, but about providing collateral. As long as the bonds undergo strict scrutiny, even if there are problems with the debt in the end, it won’t result in a total loss.

Returning to his office in a daze, Philippot sat down and started smoking. He began to ponder whether he should raise funds from other sources to fill the gap.

With high commissions and early redemption penalties, after accounting for operating costs and taxes, the estimated loss from this crisis was about 5.6 million guilders.

As for operating costs and taxes, the commissions earned earlier and the returns generated from those in the financial market had already covered them.

If everything is accounted for, the actual loss from this deal might be even smaller, which is why the financial industry is often considered highly lucrative.

Even if all bondholders demand early redemption, the total amount needed would be just 600,000-700,000 guilders. The company’s project funds can cover half of this amount. Selling some of the long-term stocks and bonds held can raise another 1.5 million guilders.

Selling a few mansions under his name can raise another 400,000-500,000 guilders, leaving a final gap of just 1 million guilders.

As long as the company is preserved, these funds can be earned back. After all, Philippot’s securities company isn’t operating in isolation; it also holds shares in a bank.

The profits Philippot earned from the company were largely reinvested into other fields, with a significant portion going into banking.

Even in this critical moment, he had no intention of selling his bank shares. Without the status of a bank shareholder, financing for the securities company would become difficult.

While he was contemplating how to raise the funds, a familiar voice came from outside.

“Mr. Philippot, good news, good news!”

Philippot, feigning calm, said, “Alfa, speak slowly, don’t get excited.”

The young Alfa, panting, said, “We just received news that Wells Fargo Securities is buying Russian bonds on the market. However, the price is a bit low. They’re only offering 20% of the face value, which is even lower than the current market value, and they’re only buying the bonds issued by Russians specifically to Austria.”

After the Russian government announced a default, Russian bonds devalued. They didn’t become worthless overnight since there was still a slim hope that the Russians might pay up, although it was highly unlikely.

The bonds still had value, but unfortunately, there was no market for them. Regardless of the price, nobody dared to buy them. Collecting debts from the Russians was not something people believed they had the capability to do.

The actions of Wells Fargo Securities undoubtedly provided a boost to the market. However, this had little to do with Philippot. Repurchasing Russian bonds was already a significant risk, so trying to profit from arbitrage by buying bonds from the market was out of the question!

Such high-risk ventures were only for the big players. As a small player in the capital market, it was better to stay out of it.

“Contact them immediately. We have a large number of bonds on hand. Ask them if they want to buy. If they are willing to pay 50% of the face value or even 40%, I’ll sell to them!”

This was a test. Compared to the financial giants, Philippot was not well-informed.

Whether Wells Fargo Securities was spreading misinformation or if there was a real turnaround was entirely unknown.

After all, the amount of bonds held by major institutions was much larger than theirs. Financial institutions being forced to repurchase bonds in advance were not just one or two.

To stabilize the situation, it’s entirely possible that a false rumor was spread. It wasn’t just Philippot who was skeptical; many financial institutions in Austria were also doubtful.

The stalemate in Russo-Austrian negotiations was an open secret, and most people in the financial sector were closely monitoring the progress of the talks.

It wasn’t hard to find out specific details. Getting information from Austrian diplomats might be difficult, but figuring out the negotiation process from the Russians was just a matter of money.

However, the authenticity of the information couldn’t be verified. Typically, Russian bureaucrats were quite reliable and known for their professional ethics of getting things done for a fee.

If they couldn’t accomplish the task, they might even offer a refund, which many people have experienced.

But this time was different as the stakes were too high. If someone offered a high price to make them play along, it wasn’t out of the question.

The most reliable method would be to get confirmation from the Foreign Minister directly, but nobody dared to do something so foolish. The Austrian government’s dignity was not to be challenged, and spying on state secrets was a deadly offense.

Testing Wells Fargo Securities became the only option. If the negotiations had made progress, holding a large amount of Russian bonds would be highly profitable. If not, the situation would remain the same as it is now.

THIS CHAPTER UPLOAD FIRST AT NOVELBIN.COM