The Ukrainian Hryvnia fell to a record low today with warnings from Russia regarding defaults.
Russia had pledged bailout loans to Ukraine, but following the overthrow of president Viktor Yanukovych, Russia suspended the bailout. Ukraine now needs money from elsewhere.
Russia Warns of Ukraine Default
Bloomberg reports Ukraine Delays Government Vote as Russia Warns of Default.
Acting President Oleksandr Turchynov pushed back a parliamentary vote to Feb. 27 from today as he attempts to win agreement with protest leaders who orchestrated the revolt.
With Yanukovych on the run after weeks of anti-government protests turned deadly, Ukraine’s new leaders are grasping for a financial lifeline as Russia weighs the fate of a $15 billion bailout it granted in December. Russia’s deputy finance minister said there’s a high chance Ukraine will default.
While Ukrainian assets have benefited from the momentum for financial aid, government bonds snapped three days of gains. The yield on dollar debt due 2023 was up 30 basis points at 9.554 percent at 5:32 p.m. in Kiev. The hryvnia plunged 6.4 percent to a record 9.8 per dollar, data compiled by Bloomberg show.
Ukraine risks default without “significantly favorable changes” in its political crisis, Standard & Poor’s said Feb. 21 as it cut the nation’s credit rating to CCC, leaving it eight levels short of investment grade.
Russia’s Deputy Finance Minister Sergei Storchak echoed those concerns. Russia won’t be the party to declare default, though it’s under no legal obligation to disburse the remaining $12 billion of the bailout, he told reporters in Moscow today.
Lawmakers yesterday moved quickly to appoint Stepan Kubiv, the ex-chairman of Lviv-based VAT Kredobank, to head the central bank after voting out Ihor Sorkin. Kubiv plans to invite an International Monetary Fund mission, the Unian news service reported, without giving details. The central bank imposed capital controls this month to stem the hryvnia’s slide.
Ukraine Asks for $35B, Bank Runs Underway
The Financial Times reports Ukraine’s interim government asks for $35bn in loans.
Ukraine said on Monday that it needed $35bn in aid over the next two years, including urgent loans within two weeks, but the international community seemed unlikely to start talks on a big rescue package before elections in May.
Yuriy Kolobov, Ukraine’s acting finance minister, said Kiev would pursue the short-term loans from individual countries, singling out the US and Poland as potential lenders.
But Radoslaw Sikorski, Polish foreign minister, said that Ukraine should look to the International Monetary Fund for assistance.
Despite the urgency from Kiev, the IMF is insisting that tough conditions will have to be agreed before any loans are paid out. This is increasing pressure on countries to provide more immediate support bilaterally.
But analysts said there were signs of capital flight, including the start of runs on some Ukrainian banks, draining Kiev’s already meagre dollar reserves. Officially, Ukraine has slightly more than $17bn in reserves, down from an already low $20.4bn at the end of last year.
The hryvnia currency has also hit five-year lows. The country of 46m people must pay back some $12bn of its $73bn debt this year.
Will Aid Come Quickly Enough?
Financial Times blogger Peter Spiegel asks Will Ukraine Aid Come Quickly Enough?
Almost all major economic powers were out on Monday saying that any aid package would have to wait for a full International Monetary Fund programme. But such “stand-by arrangements” can take months to negotiate – and IMF officials have made clear they want a new government firmly in place before those negotiations can begin, so that may mean we’re waiting until after May’s presidential elections.
So will Ukraine make it until then? Analysts are dubious, and the Ukrainian finance ministry’s declaration on Monday that they are seeking bilateral loans from the US and Poland in the next week or two certainly implies that they’re not sure they can make it that long either.
At the beginning of the year, the National Bank of Ukraine reported that it held $17.8bn in reserves. That may sound like a lot, it’s down a whopping $2.6bn from the month before – a 13 per cent decrease. And there are suddenly a lot of demands on the remaining reserves.
First, in order to keep the Ukrainian hryvnia from completely tanking during the crisis, the central bank has had to purchase huge volumes of the currency on the open market. A new report issued today by the Institute of International Finance – the association of all major global financial institutions – said that in January alone, the central bank spent $1.7bn shoring up the hryvnia.
The second, potentially more troubling development is what the IIF believes to be an accelerating run on Ukrainian banks, with depositors demanding withdrawals in dollars. Since the IIF is an association of banks, their data is probably pretty good on this. They figure that reserves probably fell by another $3.5bn-$4bn by the end of last week due to those dollar withdrawals.
According to an investor presentation made by the finance ministry last year, 16.3 per cent of its $73.1bn in national debt must be repaid this year. That’s about $12bn. In its downgrade of Ukraine last week, Standard & Poor’s estimated that it’s closer to $13bn, when you add the debts of the state-owned gas company Naftogaz.
As S&P; noted, if the central bank runs short of dollars to defend the hryvnia in the currency markets, that could lead to a rapid devaluation. Indeed, it’s already dropped about 16 per cent since the start of the year. With 46.5 per cent of Ukrainian debt denominated in dollars, and another 3.2 per cent in euros, a rapid devaluation means the value of those debts suddenly goes up, and the cost of refreshing reserves goes up, too.
In other words, not a pretty picture. And one that could get a lot worse very quickly unless someone steps in to stanch the bleeding.
The above chart pegs the value at 9.155 to the dollar.
Recent reports say the hryvnia was down 7 percent at one point Tuesday, to 9.8 hryvnia per dollar.
Mike “Mish” Shedlock