The country is insisting that its creditors take a 40% haircut, or it threatens to declare a unilateral moratorium. Important but self-imposed deadlines are approaching. The country is not Greece but Ukraine.
The IMF initially insisted that Ukraine reach terms with its creditors before getting more assistance. However, it now signals that sticking with its program is more important that striking a deal with it creditors. If it must default to the latter, but adhere to the former, assistance will still be forthcoming.
Ukraine and the IMF want the country’s $70 bln of debt to be restructured by the end of the month. The creditors offer extending maturities and deferring interest payments, but the Ukraine government is insisting on debt relief. The government claims that debt relief is the only way to honor the IMF demands, 15.3 bln euro of debt savings in the next four years, debt to GDP no more than 71% of GDP in 2020, and limiting government financing costs to 10% of GDP in the 2019-2025 period.
The creditors say a haircut is not necessary. Lowing debt service costs can be achieved via lengthening maturities and postponing interest payments. The creditors reportedly offered to extend maturities by up to ten years and temporarily lower some coupon and principal payments. The creditors also argue Ukraine can draw down its reserves to pay down its debt. However, Ukraine has passed laws to prevent this kind of use for reserves.
The Bloomberg consensus anticipates that the Ukraine economy will contract by 6.75% this year. The government does not seem particularly optimistic that the structural reforms, which the IMF has advocated and recognized their implementation, will put the country a strong and sustainable growth path in the coming years. An underlying challenge that the IMF reforms do not appear to address is that nearly 60% of the economy in regarded as unofficial/shadow.
Ukraine and the IMF may reach a staff level agreement as early as next week. Ukraine’s parliament must adopt three measures, none of which addresses the structure of the economy. Specifically, two of the measures relate to the independence and structure of the central bank. The third involves the ability of the state oil and gas monopoly to collect receivables.
The IMF has a procedure for “lending into arrears” when a country has defaulted to its creditors but adheres to the IMF’s program. The implementation of the IMF’s program is a key factor cited by officials distinguishing Ukraine’s case from Greece’s. There are a few other differences too. Greece’s primary foreign creditors are officials, not the private sector as is the case of Ukraine. Tax payers money was used to lend directly to Greece (EU and EU governments) to try to contain the crisis and limit the contagion, or to buy Greek bonds from the private sector (ECB).
Another difference, of course, is that the geo-strategic importance of Ukraine is obvious. Russia annexed Crimea and is fostering the breakaway movement in east Ukraine. The humanitarian crisis in Ukraine is more intuitive than the one that the Syriza government claims is the case in Greece. While basic services like electricity have been threatening in some parts of Ukraine due to the insurgent, a couple hundred thousand in Greece reportedly do not have access to electricity because they cannot afford it. We have argued that Greece’s geo-strategic importance is significant and has often been neglected by analysts.
At the end of next week (June 20) Ukraine owes Russia a roughly $75 mln payment to service the 3 bln Eurobond Russia holds. That bond matures later this year, but Russia is claiming senior creditor status (like the EU sovereigns and, even more so, the IMF claim for themselves) and refuses to negotiate with Ukraine over debt relief.
Perhaps the key difference is that after a 25% contraction in the Greek economy, a doubling of unemployment and 11% cut in government payrolls (2011-2013), the social and political fabric has broken. With deflation gripping the economy, the nominal economy has imploded. The election of Syriza (that garnered a little more than a third of the vote) itself reflects that breakdown. It is not just about this or that personality in the Syriza government or some of the petty issues that have been aired. The official sector cut off aid to Greece six months before Syriza was elected.
The Syriza government is often called radical, but it agrees with many critics in the private sector that “extend and pretend” strategy that the official creditors are insisting on is futile and ultimately destructive. The IMF has argued for debt relief, but it has not pressed hard and is very generous with European (taxpayer) money but refuses to lead by example.