Ukraine: Default Rumors Spread, Coalition Government Collapses, Russian Power Grab Coming Any Minute
Gregory White | Mar. 2, 2010, 10:11 AM | 2,250 | 5
PrintTags: Europe, Russia, Debt
The Ukrainian Government has collapsed as a result of the ruling coalition breaking up, according to the BBC.
As a result, rumors of sovereign default are beginning to surface for the already debt troubled state, which had hoped its market fortunes would improve with the election of pro-Russia president Viktor Yanukovych.
If the default rumors are true, Ukraine would be in need of serious economic assistance. The European Union, already tangled up in the Greek crisis, is unlikely to have the will to also support the non-Euro zone Ukraine.
While the potential for the deal the Ukraine has been working on with the IMF to come through remains, this does leave considerable room for Russia to enter into the conversation.
Russia's relationship with the Ukraine since the fall of the Soviet Union has been mixed, with the country often swapping pro-EU leader for pro-Russian. Now with a pro-Russian leader Yanukovych at the helm, Moscow could try to take this opportunity to reassert influence over its neighbor.
First that horrid flu, after mysterious chemtrailing, then this:http://www.forexyard.com/en/news/Ukraine-says-needs-billions-must-wait-months-for-IMF-2010-03-02T181444Z-UPDATE-2
Ukraine says needs billions, must wait months for IMF-UPDATE 2 Wednesday March 03, 2010 08:14:18 PM GMT
UKRAINE-DEBT/ (UPDATE 2)* IMF to return only in the second half of the year
* Ukraine needs to find billions until then, but from where?
* No foreign sovereign debt due until Dec, but T-bills heavy
By Natalya Zinets and Sabina Zawadzki
KIEV, March 2 (Reuters) - The International Monetary Fund is unlikely to return to Ukraine, where propped up state finances, until the second half of this year so Kiev will need to find billions of dollars until then, a top official said on Tuesday.
Deputy Finance Minister Oleksander Savchenko said Ukraine had few sources of funding to find the $3-5 billion it needed per quarter to cover budget spending.
Investors had been worrying about a sovereign default for a year, but this has so far not happened and the government has only one Eurobond to pay back this year -- in December.
But the ex-Soviet republic has been hit hard by the global downturn -- its economy shrank 15 percent last year -- and state finances had been propped up by the $16.4 billion IMF bailout.
The IMF suspended its lending in November amongst political turmoil and broken promises, making it a struggle for the government to pay domestic debts, wages and other expenditures.
"Until the IMF comes back -- I think in the third quarter it will start financing Ukraine -- we need per quarter minimum $3 billion and maximum $5 billion in order to cover our spending ...," Savchenko told journalists.
The IMF has said it would return after a presidential election -- won by president Viktor Yanukovich earlier this month. But political turmoil continues as Yanukovich seeks to consolidate his power.
The speaker of parliament said on Tuesday that the coalition of Yanukovich's arch rival, Prime Minister Yulia Tymoshenko, has collapsed and on Wednesday the assembly is due to hold a vote of no confidence in her government.
If the vote passes, the government will remain in place until a new one is created -- a process likely to take weeks if not months.
"RISKS BUT DEFAULT NOT INEVITABLE"
Ukraine failed to borrow abroad last year and since the IMF suspended its programme it has been issuing an increasingly large amount of short-term domestic debt at skyhigh yields.
These T-bills are now maturing, putting an additional strain on the state's finances and forcing the finance ministry to issue even more debt to cover the payments.
However, the central bank owns about 70 percent of all domestic debt in circulation, while foreign investors own 1.1 percent or about $130 million.
Savchenko indicated the government was aware that issuing T-bills -- with yields of 20-30 percent -- would only cause deeper problems in the future as they come home to roost, saying domestic borrowing is "expensive".
That leaved the opinion of foreign debt and help from the central bank, using its reserves.
"We cannot issue a Eurobond until the (2010) budget is passed and cooperation with the IMF is resumed. But we can issue debts privately. These are more expensive, but in a critical situation such steps need to be taken," he said.
Earlier, an aide to Yanukovich warned about the state of the government's finances saying its obligations amounted to 25 billion hryvnias ($3.1 billion) yet only 2.5 billion hryvnias were lying in state coffers.
"This does not mean default is inevitable, but it does mean very high risks," Yanukovich's chief of staff Iryna Akimova said, according to a statement on his Regions Party website.
But she did not make clear about which obligations she was talking about -- debts or budget spending on pensions and wages -- and for which time period.
In March, the payment schedule is not too heavy -- Ukraine must pay back about 790 million hryvnias (just under $100 million), the bulk of that next Wednesday.
But in April, it will have to repay 3.7 billion hryvnias ($460 million) worth of debt and officials have said this would be a difficult payment to make.
For factbox on Ukraine's debts [ID:nLDE62123L] For analysis on challenges including default [ID:nLDE6060OK] For full coverage of post election aftermath [ID:nLDE60I25W]