Emerging nations' US-backed debt to lose premium in default scenario

By Marc Jones

LONDON (Reuters) - Bonds from emerging nations like Israel and Tunisia that have top ratings due to special U.S. government-backed guarantees will instantly lose those premiums if Washington stumbles into a default.

Lawmakers in the United States appeared to be closing in on a deal on Wednesday to raise the country's $16.7 trillion borrowing limit but rating firms have warned that if talks fail and payments are missed, the result would be a default.

For Israel and Tunisia, which have been helped by Washington in the past with U.S. guarantees on their bonds, this could intensify the wider global market turmoil that a U.S. default could trigger.

"If the U.S. government were to go to default (S/D rating), the guaranteed notes would drop to the ratings of respective sovereigns," said Moritz Kraemer, Chief Rating Officer at Standard and Poor's.

The guaranteed bonds were downgraded in line with the United States back in 2011 when S&P became the first agency to remove its prized AAA rating from the world's biggest economy. The other agencies say they would do the same if they cut Washington, although Fitch says it doesn't rate any of the bonds concerned.

"Ratings that are directly linked to the U.S. government's rating would move in lock-step with any U.S. sovereign rating action," said Moody's.

The U.S. guarantees were provided to help countries whose market access has been stifled by political upheaval. Israel issued more than $4 billion in U.S. government-backed debt in 2003/2004 while Tunisia issued $485 million last year.

The United States also said in August it had agreed to guarantee a dollar bond for Jordan of up to $1.25 billion, with the aim of having the guarantee in place by this month.

The bonds' prices are likely to fall if the United States is downgraded but there has been limited impact so far as investors focus on the likelihood of a last-minute deal.

"It is still unlikely that the impasse in the U.S. will result in failure to pay interest obligations," said Daniel Broby, chief investment officer at Silk Invest, adding: "Tunisia is more impacted by local politics and its own budget issues."

The impact on supranational institutions such as the World Bank which are backed by the United States via its funding would be less clear-cut.

"Supranational criteria is much more nuanced and to a large part based on the intrinsic financial strength of the multilateral," said S&P's Kraemer.

"The World Bank etc ... are not a direct derivative of the U.S. rating and the institutions do not depend on budget transfers from the Treasury."

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