Divided Ukraine skirting default By Robert M Cutler
MONTREAL - Rising concern that Ukraine, suffering tumbling demand for its
exports as the global economy slows down, is heading towards default on its
international debt may yet nudge its government to rein in political
infighting, even as leading factions position themselves for an election next
After giving warning last week, Standard & Poor's on Wednesday cut its
credit ratings across the board for Ukraine - ranking it alongside Pakistan -
as fears grew that domestic politics could prevent the necessary steps to avoid
international financial default later this year.
The ratings agency cut the country's foreign currency credit
ratings, both long and short term, from "B/B" to "CCC+/C" (seven levels below
investment grade) and its local currency ratings from "B+/B" to "B-/C".
The move followed a downgrading by the smaller Fitch rating company of
Ukraine's long-term foreign and local currency rating from "B+" to "B" (five
levels below investment grade) and a warning by Moody's that it might also cut
ratings of many of the country's major banks.
Much depends on how the country's current negotiations with the International
Monetary Fund (IMF) for a US$16.4 billion program develop. The main stumbling
blocks are reducing the budget deficit and restructuring the banking sector. As
far as the latter is concerned, the World Bank and European Bank for
Reconstruction and Development have just announced their readiness to expend
$1.35 billion in loans or minority-stake purchases in the banking sector.
The Financial Times believes that bank and corporate defaults are inevitable
even if an IMF program is agreed, which should allow the country's foreign debt
to be serviced. However, this does not mean that corporate debt will escape
unscathed without restructuring. This is where the fall in the value of the
currency, the hryvnia, does not help, as it will continue to encourage
depositors to run on the banks while weakening the latter's capital base.
On Tuesday, just one day after the national bank had sold $92 million on the
market at 7.90 hryvnia to the dollar, the national currency reached a new
intraday low of 9.23 against the dollar. This decline, which is now reaching
critical levels, builds on weakness characterized by a bank run last October
and a now year-long stock market crash.
The hryvnia recovered to close Wednesday at 9 to the dollar, but some currency
specialists nevertheless see a possible low of over 9.7 to the dollar within a
month, equaling the all-time low attained last year.
Current estimates of the country's economic performance for 2009 range down to
a contraction of 9%, following last year's 2.1% growth rate, itself down from
7.6% the year before. Industrial production is already down over a quarter from
the beginning of last year.
For the budget deficit, things are moving very quickly. The deficit was first
announced at 5% while it was generally believed that the IMF was insisting on a
deficit-free budget. However, late on Tuesday a new deficit estimate of 3% was
announced, a figure that Vice Prime Minister Hryhoriy Nemyria said on Wednesday
would be acceptable to the IMF. Kiev now hopes for a visit by an IMF delegation
within the fortnight.
Credit-default swap quotations - a measure of risk, with higher quotes
signaling higher risk of default - were not available on Wednesday due to
illiquid market conditions. On Tuesday, they were quoted above 4,000 basis
points. By comparison, Iceland's quote was 1,100 basis points at the worst of
its troubles a few months ago, and Pakistan is at 2,500 basis points.
Every 100 basis points represents a $100,000 cost for insurance against default
of every $10 million held. Bloomberg News, quoting CMA Datavision, reported
that the levels imply a market expectation of over a two-in-three chance of
default within the next two years and more than a nine-in-10 chance within the
next five years.
A default could have significant results for Europe, as it would require a
prioritization of debt payments, with no guarantee that Moscow's invoices for
natural gas will be high on the list. Total European bank exposure is in the
neighborhood of $45 billion.
As Ukrainian parliament speaker Volodymyr Lytvyn told journalists two weeks ago
after meeting with European Union officials in Kiev, the European Union is even
more worried about the country's political stalemate than Ukrainian politicians
themselves are, but "there is no way to reconcile and consolidate the key
players before the presidential election in Ukraine".
Ukraine's next presidential ballot is scheduled for mid-January 2010, when
Prime Minister Yuliya Tymoshenko is expected to run against President Viktor
Yushchenko, with whom she made common cause in the "Orange" revolution at the
end of 2004 but has since had fallings-out (see
Ukraine goes from orange to red, Asia Times Online, October 22, 2008).
While some observers think Tymoshenko looks to Russia for a loan to rescue
Ukraine, others suspect that Yushchenko may seek to influence the central bank,
complicating the situation of Tymoshenko's government on debt repayment, to her
This competition and conflict was evident as early as last autumn in the
conflict within the highest ranks of the Ukrainian political elite over whether
Kazakhstani oil should be permitted to cross the country so as to enter an
east-west pipeline from Odessa to Brody that would continue on for export to
world markets through a line to be constructed to the Polish port of Gdansk
clash threatens oil to Europe, Asia Times Online, August 2, 2008.)
Nevertheless, the current trainwreck of Ukraine's international credit ratings
may, by focussing the attention of the country's political elite, have helped
to avoid a worse catastrophe of sovereign default, at least in the near term.
Still, this present conjuncture is likely not even the end of the beginning.
Robert M Cutler (http://www.robertcutler.org) is a senior research
fellow in the Institute of European, Russian and Eurasian Studies, Carleton