MacroScope

A glimmer of hope in Kiev

By Mike Peacock
February 21, 2014

A glimmer of hope in Ukraine?

Let’s not count our chickens after 75 people were killed over the past two days but President Viktor Yanukovich’s people are saying an agreement on resolving the crisis has been reached at all-night talks involving the president, opposition leaders and three visiting European Union ministers.
A deal is due to be signed at 1000 GMT apparently although no details are as yet forthcoming. There has been no word from the EU ministers or the opposition so far.

Even if the violence subsides and some sort of political agreement is reached (a huge if), there is potential financial chaos to deal with despite Russia’s only partially delivered pledge of $15 billion to bail its neighbour out.

Standard & Poor’s has cut Ukraine’s sovereign rating for the second time in three weeks, saying the political situation has deteriorated substantially, posing an increased risk of default. The rating is now deep in junk territory at ‘CCC’ and with a negative outlook, meaning further cuts are likely.

Moscow is expected to pay the second instalment of $2 billion soon but has signalled that Yanukovich must first restore order to get it. So in essence the EU says sanctions will be imposed if the violence doesn’t stop while Russia says aid money won’t flow if the violence does stop and the opposition has not been quelled.

Russian Prime Minister Dmitry Medvedev said Moscow would not hand over cash to a leadership that let opponents walk over it “like a doormat”. S&P said Russian support through 2014 was uncertain, putting Kiev’s abilities to service its debt at increasing risk.

Friday is ratings day. Today brings Moody’s on Spain. Spanish government debt is currently just a notch above junk. Chances are Moody’s will leave rating the same. It may move but there is still a lot of debt and the Spanish economy is not out of the woods yet with unemployment still way too high.
Fitch Ratings has already affirmed Austria’s credit ratings at AAA with a stable outlook, saying the government’s favourable budgetary position meant it could handle the cost of restructuring nationalised bank Hypo Alpe Adria.

The big economic event – the G20 finance ministers’ meeting – is in Australia, outside our region. But there is bound to be follow on from some of the comments there, particularly on whether the U.S. Federal Reserve is at fault with its tapering for emerging market asset turmoil.
U.S. Treasury Secretary Jack Lew and Britain’s George Osborne are already out saying emerging countries should look to themselves and not blame others – which won’t  go down well with Russia, Brazil, Turkey and other who will be there. Japan’s Taro Aso and Germany’s Wolfgang Schaeuble have said much the same.

Nigeria has shot itself high up the emerging market worry list with President Goodluck Jonathan’s sudden suspension of Central Bank Governor Lamido Sanusi, the most outspoken critic of the government’s record on tackling corruption. Markets were not happy. All local ones stopped trading at least for a while and the central bank had to intervene to pull the naira up from a record low against the dollar.

One of the things that needs to be ascertained is whether Jonathan has the right to act against the central bank governor, something Sanusi says he doesn’t. Others have said that Jonathan can suspend him, rather than fire him.

Italy’s centre-left leader and next prime minister Matteo Renzi dismissed speculation late on Thursday that wrangling with his likely coalition partners was holding up an agreement and said everything would be wrapped up “in a matter of hours”.

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