Ukraine’s $58 billion problem
Ukrainian officials were at pains to reassure investors last week that no debt default was in the offing. But people familiar with the numbers will find it hard to believe them.
The government must find over $5.3 billion this year to repay maturing external debt, including $3 billion to the IMF and $2 billion to Russian state bank VTB. Bad enough but there is worse: Ukrainian companies and banks too have hefty debt maturities this year. Total external financing needs– corporate and sovereign – amount to $58 billion, analysts at Capital Economics calculate. That’s a third of Ukraine’s GDP and makes a default of some kind very likely. The following graphic is from Capital Economics.
In normal circumstances Ukraine — and Ukrainian companies — could have gone to market and borrowed the money. Quite a few developing countries such as Lithuania recently tapped markets, others including Jamaica plan to do so. Ukraine’s problem is its refusal to toe the IMF line. Agreeing to the IMF’s main demand to lift crippling gas subsidies would unlock a $15 billion loan programme, giving access to the loan cash as well as to global bond markets. But removing subsidies would be political suicide ahead of elections in October. And with the sovereign frozen out of bond markets, Ukrainian companies too will find it hard to raise cash.
So what options does Ukraine have? It could yet sell bonds on global markets. Or it could, as the finance minister sugggested last week, borrow at home in hard currency. But its tiny, illiquid local debt markets are unlikely to attract too many foreign investors. And yields will be ruinous. Ukraine’s 2015 dollar bond is trading with a yield of 9 percent and Ukrainian sovereign dollar debt carries a hefty 870 basis-point premium to U.S. Treasuries, among the highest in emerging markets. Analysts at Capital Economics write:
Issuing debt at interest rates of 8-10% is unsustainable for a country that even on the IMF’s optimistic projections is likely to record average nominal GDP growth (in US$) of only 4.5% a year over the next three years.
The government could also dip into the central bank’s $30 billion reserves. But this would be a temporary fix. Also, reserves are already down $7 billion since last August and spending more of this could leave the hryvnia seriously exposed in coming months.
Iceland: slipping again?
Just when you thought it was all over, Iceland looks like it’s in trouble again. The cost of insuring Iceland’s debt against restructuring or default has risen this week to 720 basis points in the five-year credit default swap market, its highest since mid-2009. That means it costs 720,000 euros a year for five years to insure 10 million euros of Icelandic debt against default.
Icelanders are to vote by March 6 on a deal to repay $5 billion lost in online Icesave bank accounts in Britain and the Netherlands. Those governments compensated savers when the bank collapsed and now want their money back from Reykjavik, but opinion polls show voters are likely to reject what are seen as the harsh terms of the agreement.
The uncertainty has driven debt insurance costs back up towards the levels seen just before the country’s banking system and government collapsed in Oct 2008.
The government doesn’t have to worry too much yet, as it has a $10 billion international aid pakcage, and no major debt maturing before 2011, when a 1 billion euro bond expires.
But if the IMF doesn’t like the look of the way the political mood is turning and decides to withhold funds, the country will find it hard to pay up.
“The main problem (Icesave) poses to Icelandic public finances is that the British and Dutch governments have enough political clout to block any financial aid to Iceland, be it from the IMF, Scandinavia or the EU, unless the issue has been solved,” said analysts at Icelandic bank Arion (formerly New Kaupthing) in a research note.
Iceland’s troubles once had the power to move other markets, given the amount of speculative capital tied up in its high-yielding markets. With capital controls on its currency, that is no longer the case.
EBRD to puzzle over E.Europe crisis
Ministers and bankers meeting at the European Bank for Reconstruction and Development‘s annual gathering in London tomorrow and Saturday have a sorry mess to scrutinise.
By the bank’s own (revised) forecasts, its region of central and eastern Europe will contract by over 5 percent this year. Many countries in eastern Europe took too much advantage of western banks’ lending spree, and businesses and households are struggling to pay back foreign currency loans.
Falling commodity prices have hit countries like Russia and Kazakhstan, and a burst consumer credit bubble is risking double-digit contraction in the Baltic states and Ukraine.
The bank’s 61 country members together with the European Union and its development bank the European Investment Bank will be discussing how to cope with the crisis and manage any recovery.
They will be looking at whether to continue giving help to several EU member countries which were due to stop receiving EBRD funds next year. Some countries may also be asking for an increase in the EBRD’s capital from its current 20 billion euros, to cope with the crisis.
The EBRD operates in 30 countries, mainly in the former communist bloc, and most recently Turkey. Those countries may be wondering if the bank could have done more to help them through the crisis, and seek more help now.
The EBRD is probably doing all that it can, but with almost 30 countries in distress it sees the bottom of its financial resources.
