By Karin Strohecker and Marc Jones
LONDON (Reuters) -Belarus government bonds tumbled back to the lows of last year's political crisis on Monday, after authorities forced an airliner to land on Sunday, arresting a journalist on board and drawing condemnation from Europe and the United States.
The moves came with Western leaders threatening sanctions over Sunday's incident, in which a Belarusian warplane forced a flight between Greece and Lithuania to land in Minsk, where a dissident journalist, Roman Protasevich, was arrested.
The 2030 and 2026 bonds slumped more than 4 cents before recovering some ground although they were still heading for their biggest drop since a disputed election in 2020 caused widespread protests.
Spreads of Belarus government bonds over safe-haven U.S. Treasuries also blew out by 61 basis points to 627 bps from Friday's levels on the JPMorgan closely followed emerging market bond index (EMBI global diversified).
EU leaders are set to discuss additional sanctions at a summit in Brussels with some leaders describing the grounding as a hijacking.
"It is really difficult to comprehend the move" said Viktor Szabo, portfolio manager at fund manager ABRDN which had held the bonds. "There is a European summit coming up in Brussels and that will be a perfect opportunity to address the issue."
Belarus has long been in the cross hairs over its human rights record. The EU first imposed sanctions on Belarus in 2004 and tightened them in 2011 over abuses of human rights and democratic standards, including vote-rigging.
The disputed August 2020 election and a crackdown on protests prompted Brussels - along with the U.S., Britain and Canada - to slap asset freezes and travel bans on near-90 officials, including long-serving and Russia-ally President Alexander Lukashenko.
"We thought there was a chance of a peaceful transition away from Lukashenko... but clearly now that chance has fallen off a cliff," added Szabo.
Michael Every, senior macro strategist at Rabobank, said the events risked sparking "massive geopolitical/economic tensions," adding that the EU's small Baltic states suddenly appear much more exposed.
Belarus bonds, currently yielding over 7%, pose a headache for major asset managers increasingly focused on environmental, social and governance (ESG) factors in their investments.
The bonds are held by major fund managers such as Amundi Asset Management, PIMCO, HSBC Asset Management and BlackRock Investment Management, filings showed. None of the firms immediately responded to a request for comment.
"Maybe we are seeing Belarus become uninvestable from an ESG perspective," said Tim Ash at BlueBay Asset Management.
Fitch said earlier in May the country's external debt position remained strained after FX reserves had almost halved in 2020 and stood at just 2.2 months of current external payments at the end of last year.
Nonetheless, total 2021 sovereign foreign currency debt repayments looked manageable at $2.77 billion with nearly half of external debt repayments owed to Russia, Fitch added.
(Reporting by Karin Strohecker and Marc Jones; Additional reporting by Simon Jessop, Editing by Tom Arnold, Giles Elgood and Andrea Ricci)
