Wednesday, January 28, 2015

Ukraine Update: Still a Complicated and Messy Situation

In this update on the debt situation in the Ukraine, we have two articles to look at. One is in The Economist titled 'Bigger and Better'. The other is in The Gulf News and is titled 'Ukraine Headache Grows for IMF'.  Please use the links to read both full articles.


Both articles provide an update and touch on some of the complicated problems the IMF has to deal with. Meanwhile, Russia is holding a $3 Billion bond due from the Ukraine in December 2015 that they can call due tomorrow if they want to. It's a messy situation.

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First some quotes from The Economist article:

"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 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.

Here are some quotes from The Gulf News article:



"The International Monetary Fund is far from being done with Ukraine, its latest mega-bailout client.
A new aid plan for Kiev — larger and longer — is under discussion and raises the risk for the global crisis lender as Ukraine sinks deeper into war against pro-Moscow separatists."
. . . . 
"The country has been choked by the loss of control to pro-Russia rebels of its key industrial region in the east, sapping productive output and revenues for the government."
. . . . 
"A new IMF program “will allow us to gain access to additional resources, which in turn will enable us to return to economic growth, restore adequate foreign exchange reserves, and ensure economic and financial stability going forward,” said Ukrainian Finance Minister Natalie Jaresko."
"The challenge is immense both for the country and the IMF, for which it will be the fourth bailout plan in less than 10 years."
"The Washington-based institution normally assists countries deep in financial crisis, such as Argentina in the early 2000s and Greece more recently."
"With Ukraine it has to reach into its pockets for a country brought economically to its knees by nine months of civil war."
“The IMF is entering unchartered waters,” Lombardi said.
. . . .
"Moreover, the IMF is weighing more money for Ukraine just as it mulls a restructuring of the country’s huge debt to commercial lenders, already equal to more than 73 per cent of gross domestic output."
"Asked about the debt issue Thursday, IMF spokesman William Murray would only say: “The mission is in Kiev and they will discuss this with the authorities among other things, full stop.”
"It is a complicated equation, according to Mitov. A debt restructuring, especially one that forces investors to write off some debt, would alleviate financial pressures on the country."
"But it also “risks alienating foreign creditors for quite some time,” meaning Ukraine would have limited access to debt markets, he noted."
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My added comments:
This is clearly a very bad situation. Every time you read updates on the Ukraine you have to have empathy for the regular citizens there just trying to live some semblance of a normal life during all this conflict. For the IMF, the stakes are high. It's reputation is on the line. If they keep pouring more billions into the Ukraine and the government falls or the country defaults, it will be huge blow to the IMF's image.
Unfortunately, just this week the military fighting ramped up and many civilians were killed. So far, neither side in the conflict seems ready to back down. How the IMF can make a loan program work in this situation is puzzling to say the least as the country has to spend much of its limited resources funding military activities. Another problem for the IMF is that Russia holds a $3 billion Ukraine bond they can call due from the Ukraine at any time. Also, the Ukraine owes Russia more than $15 billion in total. So some of the aid will just flow on through to Russia which undermines the sanctions imposed by the US and the EU.
It's a very complicated and messy situation and it does have the potential to impact the global economic situation as well. We'll just continue to look for updates as events unfold.

added note: Christine Lagarde says the situation in Ukraine is uncertain in this Bloomberg article. Here is her quote:


"Ukraine must have stability at its borders to be able to achieve economic recovery, International Monetary Fund Managing Director Christine Lagarde told French newspaper Le Monde in an interview published Monday. She said “no IMF partner would consider participating in a support program if there’s a question mark over 20 percent of Ukraine’s GDP.”
The link between the economic situation and the military one is blatant,” Lagarde said, according to Le Monde. The IMF is working on a four-year package of support for Ukraine, with “financing no doubt a little higher than what was anticipated. But that supposes the situation stabilizes -- that’s a priority,” she said."

"Lagarde said in Davos last week that she’s prepared to support the signing of a so-called extended fund facility that would replace the $17 billion standby arrangement the IMF granted in April as the conflict and a deepening economic contraction push Ukraine to the brink of default. The assumptions used since April are now “null and void,” Lagarde told Le Monde, and “we’re working on new hypotheses.”

latest info: Russian PM Warns against cutting Russia out of SWIFT

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