MacroScope

from Global Investing:

Ukraine aid may pay off for Kremlin

Ukraine said today it was issuing a $3 billion in two-year Eurobonds at a yield of 5 percent in what seems to the start of a bailout deal with Russia. That sounds like a good deal for Kiev -- its Eurobond maturing next year is trading at at a yield of 8 percent and it could not reasonably expect to tap bond markets for less than that. In addition,  Ukraine is also  getting a gas price discount from Russia that will provide an annual saving of $2.6 billion or so.

But what about Russia? Whether the bailout was motivated by "brotherly love" as Putin claims or by geo-politics, it sounds like a rotten deal for Moscow. The credit will earn it 5 percent on what is at best a risky investment. What's more the money will come out of its rainy day fund which had been earmarked to cover future pension deficits. State gas company Gazprom will have to stomach a 30 percent price cut, which according to Barclays analysts is "a reminder of the risks of Gazprom's quasi-sovereign status."

But there could be positives.

Putin is clearly playing a long game that aims not only at giving the Kremlin tighter political control over Ukraine but also to bring it back into the Russian gas sales orbit and eventually create a bigger trade bloc encompassing Russia, Kazakhstan and Ukraine, says Christopher Granville, managing director of consultancy Trusted Sources in London.

Lets look at the gas issue first.

The chart above from Barclays shows how Gazprom's exports to Ukraine have plummeted in recent years -- a consequence of the high tariffs for Ukrainian importers. Cheesed off by the prices, Ukrainians have been using more coal and also importing cheaper gas from Europe. So Gazprom could actually be an incidental beneficiary of the Moscow-Kiev deal, Granville says:

I'd argue this deal is fundamentally positive to Gazprom in the long run. The way I see it is that Gazprom has its been priced back into the Ukrainian market. It's reasonable to assume a material pick up in volumes, which would go a long way towards offsetting the drop in price.

Bridge of Sighs

Greece announced late yesterday that it would need a bridging loan to tide it over until it finds the nearly 12 billion euros of spending cuts demanded by the EU/IMF/ECB troika of inspectors, after which the next tranche of bailout money can flow, probably in September. The troika is due to return next week. There’s no doubt Athens will get the interim money. Jean-Claude Juncker, who chairs the group of euro zone finance ministers, said last week that nobody should fret about Greece’s finances in August. They would be shored up.

Today, Finance Minister Yannis Stournaras is expected to put a draft list of cuts to the leaders of the three parties comprising the country’s ruling coalition, who are rather hemmed in by pledges to voters not to fire civil servants and shun sweeping pensions and public sector wage cuts.

Italian Prime Minister Mario Monti threw in a curve ball last night, saying there was a real prospect that the autonomous island of Sicily could default. It accounts for about 5.5 percent of Italian GDP so shouldn’t wreck the country’s finances but it’s not a step in the right direction. If Italy’s debt mountain of 120 percent of GDP started rising rather than falling, it could be taken very badly by the markets.