Ukraine threats: war and default

With the hryvnia that has lost more than half of its value, the shrinking GDP and the rising costs of the war, Ukraine is on the brink of the default. The country have money for just a week, according to The Economist, while the aid offered by Europe and US are a drop in the ocean of the 15 billion dollars needed for the rescue. Meanwhile, Russia could play its cards.

Kiev, Ukraine Protesters gather to demand for changes in the financial policy of the Ukrainian National Bank in front of the cabinet of ministers building in Kiev, December 16, 2014. The posters read, Kiev, Ukraine Protesters gather to demand for changes in the financial policy of the Ukrainian National Bank in front of the cabinet of ministers building in Kiev, December 16, 2014. The posters read,

It’s just like a new front is open. While the battle is raging throughout the friction line with the separatist territories, a new enemy undermines the stability of Ukraine. Already in December, Standard& Poor's downgraded the country rating to CCC-, while for Moody's the risk of default is "excessively high". The reserves of foreign currency, about 7, 5 million dollars a month ago, were estimated sufficient to no more than five weeks. And already four have gone.

The government persists to delay any decision, while some economists are convinced that the longer any action is postponed, the more traumatic the step will be. "Ukraine should consider defaulting”, wrote the economist Sasha Borovik. “And it should think twice about taking any ruinously expensive short-term debt to avoid default. It is hard to see how Ukraine’s shrinking economy can service its current debts. The longer Ukraine delays, the greater the pain will be when its credit finally does run out”.


Ukraine needs at least 15 billion dollars to fill the hole. And no one is willing to put them on the table. Europe and the US offered something like 4 billion altogether. On the other side, Russia’s 3 billion dollars bond, expiring in December, could annihilate the yet timid American and European help.

Meanwhile, yesterday (February 5th) the central bank of Kiev has raised the discount rate to 19%. Within a few hours the hryvnia was exchanged at 25 with the dollar, 34% less.

In addition, there is the war. According to the President Petro Poroshenko, as reported by The Economist, the conflict in Donbass eats up 10 million dollars per day. It is an hemorrhage that can only worsen the already serious conditions, and that is growing every day. The counter- offensive launched by separatists in the past few days, in fact, requires an increasing war effort by the national army. And the signals at the time do not leave a glimpse of peace chance.

Vuhlehirsk, Ukraine A member of the armed forces of the separatist self-proclaimed Donetsk People's Republic looks on near a building destroyed during battles with the Ukrainian armed forces in Vuhlehirsk, Donetsk region, February 4, 2015. REUTERS/Maxim Shemetov

One more weapon

The Ukrainian central bank hopes that the International Monetary Fund would finalize the granted aid program in these days. But Christine Lagarde has already said that the IMF will not intervene until there is the war. "No partner of the IMF can consider participating in a support program if there is a question mark over 20% of the gross domestic product of Ukraine," said Lagarde as interviewed by Le Monde. "In order to reform its economy, Ukraine need stable borders, this is indispensable. There is a flagrant link between the economic situation and the military situation."

With these premises, the 3 billion dollars loan granted by Russia is a weapon in the hands of Putin. While it is due to expire only in December, according to its terms it can be called when Ukraine’s debt-to-GDP ratio goes above 60%. The official data will be published in March, but according to the Finacial Times is almost certain that the 60% ratio will be surpassed, allowing to Russia to call for the early payment. Should this happen, other bondholders would be allowed to call for the early repayment of the rest of Ukraine's outstanding Eurobonds due to the bond's pari passu clause, leading the country straight towards the default. Putin said he does not want the default of Ukraine, but there is little to bet that this situation goes in a favorable direction for the Kremlin. The Russian media don’t loose the opportunity to emphasize how the economic crisis and instability are direct results of EuroMaidan. Which can be seen as another way to say that, where Europe and US put their hands in the former USSR, they only mess up.

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