Ukraine to get serious money

March 12, 2015

International Monetary Fund Managing Director Lagarde speaks about the situation in Ukraine at a news conference in Brussels

The International Monetary Fund surprised on the upside with its programme for Ukraine last night, agreeing $17.5 billion in loans as expected but agreeing to pump $10 billion of that into the near bankrupt country over the next year and handing over $5 billion imminently.

IMF chief Christine Lagarde said the funds was were being “strongly front-loaded” while Kiev said it would allow the economy, currency and financial sector to be stabilized.

Ukraine will now begin talks with its bondholders to secure $15.4 billion in debt relief – an amount needed to make its debt position sustainable which is a condition for any IMF lending. A further $7.5 billion in loans is expected to come from other international organizations.

The ceasefire in eastern Ukraine is tenuous and much of the country’s industry is in that region, interest rates are at 30 percent and the currency has been in freefall so there is a long way to go, but this is serious money.

A deep recession will persist this year but the IMF now forecasts growth of 2 percent next year.
Given that Moscow has appeared intent on keeping the country unstable and under intense pressure, how it reacts to this bears close watching. NATO Secretary General Jens Stoltenberg said on Wednesday that Russia was still arming and training rebel forces in eastern Ukraine.

Most Ukrainian bonds are trading at less than half their face value, a reflection of the hefty haircut that is expected. But there is talk of extending maturities or imposing a moratorium on debt payments for some time instead. Kiev has the added complication of Russia, which has said it will not restructure its $3 billion debt.

Some of the main protagonists in the Greek bailout saga break cover today, while officials from Athens and its international creditors continue closed-door talks on the new government’s reform plans.

Greek Prime Minister Alexis Tsipras is meeting OECD head Angel Gurria in Paris with both speaking to the press afterwards. There have been suggestions that the OECD could oversee a future bailout.

Finance Minister Yanis Varoufakis, who was in Paris yesterday, said the European Central Bank was pursuing an “asphyxiating” policy to pressure Athens and its official lenders to agree to a path that will lead the country out of its crisis.

Greece wants to be allowed to sell more short-term T-bills. The ECB has refused, fearing they will be bought solely by Greek banks who will then present them as collateral for emergency funding which the ECB underpins, thereby breaking the taboo of state monetary financing. That leaves the new Greek government perilously short of cash.

German Finance Minister Wolfgang Schaeuble meets his Austrian counterpart while European EU economics commissioner Pierre Moscovici and key ECB policymaker Benoit Coeure address a Paris conference.

Greek demands that Berlin pay World War Two reparations and Tsipras’ accusation that Germany used legal tricks to avoid paying compensation for the Nazi occupation of his country hardly seem designed to reach an amicable conclusion.

Bundesbank chief Jens Weidmann speaks at the release of the German central bank’s annual results. Weidmann opposed the ECB’s bond-buying programme with new money – to no avail. With the euro disappearing through the floor and oil prices having halved, the euro zone economy is getting a sizeable boost even before the ECB’s new money takes effect.

The Bundesbank may soon find there are not enough Bunds out there to buy as vanishing yields squeeze the pool of eligible debt. There is also a real question as to whether this policy setting is appropriate for Germany, by far the bloc’s largest economy, if its recovery continues at its current pace.

Because of the relative size of Germany, more of its bonds will be bought than anybody else’s.
With a fair wind from the commencement of QE, auctions in Italy, Spain and Ireland today should fly out of the door today.

Spain will offer up to five billion euros of five-, seven- and 10-year bonds. Italy will sell 7.25 billion euros of three-, seven- and 30-year debt while Ireland is putting 1 billion euros of 30-year paper on the table as it seeks to pre-fund the state in full for 2016.

With a new big buyer in town there is no better time to borrow it would seem. 10-year Bund yields fell to a record low of 0.199 percent on Wednesday, Italian and Spanish 30-year yields dropped below two percent for the first time and most other euro zone bond yields were at or close to historic troughs.

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