IMF stumps up for Ukraine

By Mike Peacock
March 27, 2014

The International Monetary Fund has announced a $14-18 billion bailout of Ukraine with the aim of luring in a total of $27 billion from the international community over the next two years.

Ukrainian officials say they need money to start flowing in April. The U.S., EU and others in the G7 would row in behind an IMF package, helping Ukraine meet its debt obligations and begin the process of rebuilding. In total, Kiev has talked about needing $35 billion over two years so they are pretty close.

A comprehensive slate of economic, energy and financial reforms have been attached and the Fund appears to be content that whatever hue of government is in charge after May elections will adhere to the programme.

Yesterday, Kiev agreed to whack up domestic price gases by an eye-watering 50 percent, a liberalization of the market and cut in subsidies the IMF has demanded in talks with the previous regime but which it always baulked at.

The EU has also signed the political elements of an “association agreement” with Kiev, promising closer ties that will help draw it more closely into the heart of Europe. That is precisely what Vladimir Putin was trying to avoid so, as always, his reaction will be key.

There are some signs that the East/West standoff over Ukraine has passed its high point. The warnings to Russia are about dire consequences if it moves into eastern Ukraine, a tacit admission perhaps that Crimea’s secession is a done deal. Moscow for its part has admitted it faces damaging capital outflows and says it is keen to maintain contact with its G8 partners.

Russian Economy Minister Alexei Ulyukayev is out saying capital outflows from Russia would total $100 billion this year which would push growth down to just 0.6 percent.

That only looks possible if investors are not spooked by further escalation in Ukraine. Some $70 billion fled the country in the first quarter alone. The World Bank said yesterday that the economy could actually shrink quite markedly this year.

The central bank has said it stands ready to support domestic banks with liquidity.

Sberbank, Russia’s biggest bank, has posted a 4.1 percent rise in 2013 earnings but failed to meet its target because of a hike in provisions for loan-losses amid a deteriorating economy. Any damage from sanctions has yet to be revealed.

Putin will head a Federation Council meeting on integration of Crimea into Russia.

After three days in The Hague and Brussels with western allies, Barack Obama is in Rome for meetings with new prime minister Matteo Renzi and the newish Pope.

Washington has been a consistent advocate of growth-promoting measures over austerity – the great economic debate born out of the world financial crisis. That is music to Renzi’s ears. While insisting he will meet EU budget deficit targets, Renzi has promised sweeping tax cuts and spending programmes to boost growth without quite explaining how they will be funded.

After a characteristically silent trip around Europe, Chinese President Xi Jinping will make a speech in Paris today, alongside France’s Francois Hollande, having spent most of the day at a meeting of representatives of 400 French and Chinese firms. The focus is heavily on bilateral business and trade tie-ups.

We have a clutch of interest rate meetings today.

South Africa, having raised rates for the first time since 2008 in January in a bid to stabilise prices while the currency tumbled, is unlikely to move, not least because the rand has rallied over the last few weeks. Our polling suggests it will tighten again in the second quarter of the year with inflation hovering above target at nearly 6 percent and the currency still vulnerable.

Norway’s central bank will not budge either. Sluggish growth has forced it to delay a planned rate hike until mid-2015 according to its future rate path.

Czech interest rates are already close to zero and after intervening heavily to weaken the crown late last year it has not needed to act since and has said it will end its currency regime early next year. The Paris-based OECD said this week the central bank should keep its policy in place for no longer than six quarters.

The Bank of England’s Financial Policy Committee publishes its quarterly policy statement. Finance minister George Osborne has previously urged it to be especially vigilant about the housing market. Recommendations from the meeting could also cover broader changes to bank capital requirements or guidance on bonuses. November’s meeting saw the scrapping of Funding for Lending Scheme incentives for mortgage lending.

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