Friday, January 23, 2015

Ukraine And The IMF

DAVOS, Switzerland -- Politicians do not usually brandish big chunks of metal when giving speeches.


Poroshenko with evidence of need.

Petro Poroshenko, Ukraine’s president, did just that at this year’s World Economic Forum in Davos.

He had brought with him a bit of a bus destroyed in shelling that killed 13 civilians last week in the east of the country.

Mr Poroshenko’s emotional plea for more Western aid paid off.

On January 21st the IMF indicated that there would be a new bail-out package for Ukraine.

What many had predicted has finally come to pass: creditors will now have to shoulder some of the load.

2014 was a terrible year for Ukraine’s economy.

GDP shrank by nearly a tenth.

The currency, the hryvnia, fell by more than 50%.

As the cost of imports rose, inflation jumped, from 1% a year ago to 25%.

In a desperate attempt to prop up the currency, the central bank has been throwing cash at the markets: Ukraine’s foreign-exchange reserves have fallen from more than $16 billion in the middle of 2014 to less than $7 billion.

Debt repayments of at least $10 billion, gas-import bills and a lifeless banking sector mean that Ukraine will probably need $20 billion in external support to survive 2015.

Western help thus far has been inadequate.

In 2014 the IMF pledged to contribute $17 billion over two years.

It has disbursed about $5 billion of this.

After Ukraine passed its budget on December 29th there were hopes that more money might soon be forthcoming.

The European Union offered €1.8 billion ($2.1 billion); America pledged $2 billion-worth of loan guarantees.

Angela Merkel, the German chancellor, offered €500m (in response, her website was downed by pro-Russian hackers).

These dribs and drabs were nowhere near enough.

The proposed new bail-out looks like a step forward.

It is an “extended-fund facility”, which means that the IMF will be able to lend more money to Ukraine for a longer period.

That may help the country to implement reforms and slowly become more competitive.

But while the new bail-out may end up bigger than the old, it will not necessarily lead to the quick disbursements that Ukraine desperately needs.

For that reason Ukrainian officials were forced into a volte-face on the question of debt restructuring.

For months they have insisted that the country would repay its foreign creditors in full.

The day before the new bail-out Vladyslav Rashkovan, the acting deputy governor of the central bank, said that restructuring was “not on the table”.

The plan has now changed.

The prospect of drawn-out negotiations spooked some investors, who sold their bonds.

The hope is that the new owners will come round to Ukraine’s point of view.

Accepting some losses on loans may now be the only way they will get anything back.

The new bail-out can do nothing at all to solve Ukraine’s other big debt problem: a $3 billion bond, owed to Russia, that matures in December.

A bizarre clause in the bond specifies that if Ukraine’s debt-to-GDP ratio exceeds 60%, Russia can demand early repayment.

That, in turn, would trigger a cross-default on a big chunk of the government’s other debts.

Everyone knows that Ukraine has already passed the 60% threshold, though this will not be announced officially for a few months.

It may soon become clear that it is Russia, not the West, that holds the most sway over Ukraine’s economy.

Source: The Economist