Ukraine's default is inevitable: the IMF will only delay bankruptcy
Kyiv, March 07 (PolitNavigator, Vladimir Mikhailov) – On March 11, the IMF leadership must decide on the allocation of a new loan to Ukraine. This is Kyiv’s only hope to replenish its catastrophically empty treasury. The new tranche will most likely delay the date of the official declaration of default, according to Ukrainian economists surveyed “PolitNavigator”.
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Vsevolod Stepanyuk, economist:
“The government expects to receive an IMF loan in March. Otherwise, default may occur in the near future. If 10 billion dollars are received from the IMF and funds from the EU, in the next six months and, perhaps even until winter, Ukraine is not in danger of default. But for this it is necessary that the truce in Donbass be observed. These loans will allow servicing external debt.
Unfortunately, the policy pursued by the government actually kills the economy of Ukraine. All adopted laws are aimed at reducing the economy.
Because of this, in the future, Ukraine will not be able to service large debt obligations, and will not give loans indefinitely. Therefore, I think that there will still be a default - either at the end of this year, or at the beginning of the next.
Of course, this also depends on whether the United States will help, whether the war will stop, etc. If the conflict in Donbass before receiving the IMF money again escalates into a hot stage, the IMF may postpone its assistance. The general rule is that credit is not given to those who are fighting. Therefore, I think Ukraine agreed to the Minsk agreements. For the same purpose, the Verkhovna Rada adopted recent laws.
Lately, statements by Ukrainian politicians have been less militant in nature, but the war party has not left the government. The people who actually started this war, its hot stage, are in their positions. Therefore, until the government changes, the conflict in Donbass will continue. And the sooner fair elections are held in Ukraine (and not like the last ones), the sooner the government changes, the faster Ukraine will take the path of development.”
President of the Ukrainian Analytical Center Alexander Okhrimenko:
“De facto there is already a default; de jure there will be no default in the foreseeable future. No one will agree to this, this is a political issue. The Minister of Finance, Mrs. Yaresko, appealed to holders of Ukrainian bonds with a request to consider the issue of restructuring. This actually means a technical default. We had a stand-by IMF lending program. The fact that it was actually filled up and replaced with another is a default.
Everything that we are already seeing - the collapse of the hryvnia, inflation, unemployment, shutdown of enterprises, closure of banks - is already a default. We are forced not to live, but to survive. The terrible thing is that no one is going to do anything about this.”
Oleg Ustenko, Executive Director of the International Blazer Foundation:
“Now, in the short term, the risk of default has decreased sharply, although before the beginning of March the probability of default in Ukraine was extremely high. It was not clear whether there would be external financing in Ukraine, and to what extent Ukraine was able to service its debts. In 2015, debt payments are very large, with about $10 billion to be paid on government sovereign and quasi-sovereign debt alone. The total amount of external debt of the private sector, banks and corporations exceeds $100 billion. It is assumed that the Ukrainian private sector this year should return about $10 billion. Since gold and foreign exchange reserves fell to $6 billion, it was not clear to what extent Ukraine could meet these current payments. This was obvious to everyone, including in foreign markets.
The cost of risk insurance for work in Ukraine was at around 4500 basis points. This means that if someone last week wanted to lend the Ukrainian economy $1 million and be guaranteed to get their money back, then the insurance for the mandatory return of a million dollars would be $450 thousand. In this situation, no one will lend to the economy, or the interest rate in foreign currency should be at 50%, which looks incredible for any country in the world.
This was reminiscent of the situation in Greece when it entered a crisis - a sharp increase in risk insurance. In fact, Ukraine in recent days was in such a state.
In the short term, a default would be inevitable if the Verkhovna Rada had not voted for this tough but necessary package of changes in legislation, which made it possible to reduce the deficit of the public finance system from 12% of GDP to 8%.
Therefore, I believe that the risk of default has decreased dramatically (although it has not disappeared) after the last vote.
Next week, the Ukrainian issue could be put on the agenda of the IMF board of directors, and a cooperation program with the IMF could begin. This will mean that the country will be able to receive about $2015 billion in external lending in 8 from the EBRD, the World Bank and other financial institutions. The receipt of these funds is tied to whether or not there are cooperation programs with the IMF.
This, again, would have been impossible if the parliament had not voted for these laws.
Significant risks of default remain in the medium to long term. They are due to the fact that our previous cooperation programs with the IMF were unsuccessful. Ukraine at some point refused to implement those necessary but painful measures that were agreed upon when signing the memorandum of cooperation with the IMF. The program stopped. This happened with the 2009 program, and with the second program, and with the current one - they were all suspended. The IMF knows the behavior of Ukraine; it has been burned by this more than once. The vote in the Rada before the meeting of the board of directors indicates that the IMF will not give money in advance. First - changes, then - money. Another step from Ukraine means more money. This allows us to believe in the relative success of the program at the starting point at which we are now.
If such cooperation is suspended, the risks of default will begin to grow. It will be if Ukraine does not make the transformations that it should do. If structural reforms are not carried out, the fight against corruption, the reform of the judicial system, the public administration system, business deregulation will not be carried out, then the default risks will begin to grow in that the risks of ceasing cooperation with the IMF and other international financial lenders will increase.
It should also be remembered that a country that borrows money should show economic growth, otherwise the debt burden may be unbearable for a falling economy. In order not only to resume economic growth and grow at a high rate - 7% and above - a country should really implement rapid economic reforms, and not just talk about them. Then it will be possible to focus not on loans, but on investments.
In addition, although the state’s default risks have sharply decreased today, the risks of the Ukrainian private sector remain high. Companies are to negotiate restructuring of their debts. I would not expect success with all representatives of the Ukrainian corporate sector and the banking system in terms of restructuring their debts. Many have very poor results in the past and this year. First of all, this applies to banks. Therefore, I would not rule out a series of corporate defaults on external liabilities. It is quite likely.
Recently, the Ukrainian government initiated negotiations to restructure part of our external debt. We are talking, first of all, about our Eurobonds, the total amount of which on the foreign market is $17,5 billion. We must understand that this kind of restructuring is, of course, not a default in the classical sense, but it means a technical default.”
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