MacroScope

Money for Ukraine?

By Mike Peacock
February 26, 2014

Russia’s next move remains the great unanswered question for Ukraine but there are glimmers that things might be starting to move elsewhere.

IMF chief Christine Lagarde said last night she would send a technical support team to Ukraine soon if Kiev makes a request. It can’t do so until an interim government is formed, probably tomorrow. That would be step one, but only step one, down the road to an international aid package.

The European Union’s foreign policy chief promised Ukraine’s new leaders strong international support but offered up no specifics and there will be no meaningful bailout until after elections slated for late May although EU budget commissioner Janusz Lewandowski said bridging aid of 1 billion euros might be available.

The situation is clearly urgent though the assertion from Kiev that money must come within two weeks looks overblown.
There is jockeying for position in Kiev with allies of newly freed former premier Yulia Tymoshenko trying to take key positions and opposition leader and ex-world boxing champ Vitaly Klitschko declaring he would run for president. The formation of an interim administration will be the main internal focus for now.

The initial relief rally in Ukrainian assets has fizzled out. The hryvnia never got a lift, partly because the country’s limited reserves are probably going to have to be devoted to meeting international debt payments to avoid default leaving little to defend the currency. And Monday’s Ukrainian bond rally ended abruptly yesterday and went into reverse.

The hryvnia fell more than 6 percent on the day and if it can’t be propped up by the central bank, that raises currency risk for investors. There is also the possibility of debt restructuring as with the euro zone and what conditions the IMF will apply to any help, should it be forthcoming. So the initial market view that Yanukovich’s ouster had made default much less likely has now been clouded by a range of concerns.

There are others besides. Acting president Oleksander Turchinov expressed concern about threats to the country’s unity in mainly Russian-speaking Crimea, following protests there against the leaders who have taken charge in Kiev.

Both Russia and the West, while competing for influence, have said publicly that they do not want a split. But Russian foreign minister Lavrov, who has been talking tough, is out again calling for international condemnation of “nationalist and neo-fascist” sentiment in western Ukraine and attempts by nationalists to ban the Russian language.

South African Finance Minister Pravin Gordhan presents his annual budget to parliament, the last before May 7 elections in which President Zuma and the ANC are battling voter disillusionment over sluggish growth and high unemployment.

It will include the latest budget deficit and economic growth projections for the next three years. Data on Tuesday showed the economy grew slightly faster than expected in the last three months of 2013. Over the whole of last year, Africa’s largest economy expanded by 1.9 percent, down from 2.5 percent in 2012.

A Reuters poll of economists predicted that Gordhan would stick closely to his previous spending plans and budget deficit target at around 4.2 percent of GDP – in other words this will be no pre-election giveaway budget.

The South African Reserve Bank raised interest rates by 50 basis points to 5.5 percent last month to ward off inflation pressures stemming from a weaker currency hit by emerging market turmoil, a tightening that will hit consumers already struggling with high debt levels.

There are government ructions all over the place. Romania’s Liberal party pulled the plug on the coalition government on Tuesday and its ministers will submit their resignations to the prime minister on Wednesday.

The move will force premier Victor Ponta’s Social Democrats to seek a vote of confidence from parliament. Analysts expect them to win but it’s an unwelcome diversion for a country that has got back on its feet thanks to five years of economic reforms backed by the IMF.

Cyprus’ junior coalition partner the Democratic Party is expected to quit the centre-right administration of President Nicos Anastasiades, angered over his decision to relaunch peace talks with Turkish Cypriots. The decision is not expected to impact implementation of a 10 billion euro bailout programme from the EU and the IMF.

And who knows what will come next in Turkey. Prime Minister Tayyip Erdogan accused his enemies of hacking state communications to fake a phone conversation suggesting he warned his son to hide large sums of money before police raids in a graft inquiry. Erdogan remains overwhelmingly the country’s most popular politician but markets took fright at the latest turn of events.

Germany’s GfK sentiment survey, just out, showed consumer morale rose to its highest level in seven years heading into March as shoppers in Europe’s biggest economy became more upbeat about their future income. That’s an interesting counter to yesterday’s Q4 GDP data which showed marked weakness in domestic demand and suggests better times to come.

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