The European Central Bank also announced yesterday that it will support the Hungarian central bank's money market operations with as much as 5 billion euros ($6.7 billion) to help it ease the present financial tensions. The agreement will provide the central bank with a facility to borrow up to 5 billion euros in order to provide additional support to the central bank's operations, the ECB said in a statement this morning. The move will support the Hungarian central bank's "instruments of euro liquidity provision.'' This move is an important "first", since Hungary isn't a member of the 15-nation euro region, a may well set a precedent which will need to be followed as more and more of the walking wounded limp over and present themselves at the Kaiserstrasse front door, before being politely shown round the back to the overnight lending window.
And today we learn that Ukraine may borrow between $10 billion and $15 billion from the International Monetary Fund to "strengthen its position'' during the global financial crisis, according to Deputy Central Bank Governor Oleksandr Savchenko. The cost of insuring Ukrainian debt in the credit default swaps market also increased today (Friday) by 200 basis points to reach an all-time high of 2000 bps (or 20%), meaning it will now cost $2 million a year to insure $10 million of five-year debt.
Emerging Markets Take a Bashing
Emerging equity markets sank for a third consecutive day on Friday, setting new three-year lows as more positive sentiment in developed markets was unable to lift deepening gloom.Iceland's highly indebted banking system has already driven the country and currency to collapse, while worries over banking stability in Ukraine, Serbia and Hungary have forced these three countries to seek outside help and in so doing sparked investor nerves.
Standard & Poor's has announced that it placed its 'BBB+/A-2' sovereign credit rating on Hungary on CreditWatch with negative implications. S&P has also placed the following ratings on Ukraine on CreditWatch with negative implications: its 'B+/B' foreign currency and 'BB-/B' local currency sovereign credit ratings on its global scale; and its 'uaAA' ratings on its national scale.
“The CreditWatch placement reflects our concerns over mounting financial-sector
funding pressures and their potential to raise general government debt
materially from its current level of 67% of GDP," explained Standard &
Poor's credit analyst Kai Stukenbrock. S&P said the weakened funding profile
of these institutions stems not only from the current turmoil in credit markets
throughout the industrialized world but also from domestic issues.
“Much of this credit growth has been denominated in foreign currencies and was - to a large extent - financed by rising external debt, which for the financial sector alone reached a high 34% of GDP in 2007. Some domestic banks have ownership concentrations that make raising equity capital more difficult."
The International Monetary Fund is prepared to give Ukraine credit of $14 billion in a bid to help stabilise the country's financial system, a spokeswoman for President Viktor Yushchenko stated on Friday. An IMF mission is currently in Ukraine to see how it can help cushion the effects of the global financial crisis. It began its day meeting Prime Minister Yulia Tymoshenko and was holding talks later with Yushchenko. The process is not helped by the fact that the two former allies from Ukraine's pro-Western "Orange Revolution" of 2004 are now openly at loggerheads.
Tymoshenko, for example, stated on Thursday said the Fund was considering granting a credit ranging from $3-14 billion, contingent on the postponement of an early election called by President Yushchenko. The Fund subsequently denied it had made any such link.
On Friday morning, a UKraine government spokeswoman said the IMF mission's head, Ceyla Pazarbasioglu, had told the prime minister the Fund was "ready to provide help to IMF member-states."We are working very hard and are prepared to do everything within our power to help you in working out economic policy," Pazarbasioglu was quoted as saying.
Ukraine's hryvnia fell for a third day against the dollar on Friday. The hryvnia, which Ukraine's central bank currently aims to keep within a trading band 8 percent either side of 4.95 per dollar, slid as much as 1.4 percent to 5.3100 per dollar, and was at 5.2800 by 10:36 a.m. in Kiev. It has now lost 2.3 percent this week. The currency also fell against the euro, slipping 1.1 percent to 7.0892, leaving it 2.5 percent lower since Oct. 10. Ukraine's currency has slumped 13 percent versus the dollar since early September as the collapse of its governing coalition and the financial concerns reignited by Lehman Brothers Holdings Inc.'s failure deterred investors from emerging markets and nations reliant on external funding.
"The CreditWatch placements reflect our concerns over the impact of aUkraine's current account gap soared sixfold in US dollar terms during the first half of 2008 to USD 6.8 billion (an estimated 7% of GDP), but S&P believes this figure is likely to shrink markedly during the remainder of 2008 and into 2009 “as Ukraine faces a sudden stop in external financing." These last words should send a shiver down the spine of anyone who has any idea of what a "sudden stop" implies.
deteriorating economic situation and associated exchange-rate depreciation on
the country's financial sector asset quality, especially in light of its high
level of private sector foreign currency borrowing, equivalent to 35% of GDP,"
said Standard & Poor's credit analyst Frank Gill.
S&P consider that high short-term financing needs will remain, noting that Ukraine's gross external financing requirements (current account balance, amortization of long-term external debt, and stock of short-term external debt) will be 147% of international reserves over the next 12 months.
Carefully Made Property Investments?
When Lev Partskhaladze, a Ukrainian property developer, was preparing to float his company on the London stock market three years ago, he saw no end to his country’s home and office construction boom. Today, with cranes standing idle over Kiev building sites and property sales evaporating, he admits the global credit crunch is bringing the boom to a halt. “We are seeing a financial crisis transforming into an economic crisis in the world. It has not fully hit Ukraine yet but it’s close,” says the chairman of XXI Century Investments. With its shares down 97 per cent from their peak, the company is trying to raise cash by offloading projects to other developers.
In Ukraine, banks have also borrowed heavily overseas to finance credit growth and are struggling to refinance themselves. At the same time, the current account deficit is widening as prices for steel, Ukraine’s main export, plummet. So Kiev’s external financing needs are growing just as credit is short and foreign direct investment, a big source of finance in recent years, is slowing.
The Bankruptcies Start
Industrial Carriers, based in the Marshall Islands and operating from Odessa in Ukraine, has today sought protection from creditors. The company's debts reported to be related to trading of ships and derivatives.
The Baltic Dry Index, a gauge of shipping costs, has fallen 87 percent since May 20 on a slowing world economy. Steelmakers are curbing production as prices decline, cutting demand for iron ore, the biggest single source of demand for commodity carriers. Usage has also fallen because traders can't obtain credit to purchase consignments.
Daily rental income for coal and iron-ore transporters, called capesizes, tumbled to $11,580 a day yesterday, taking the decline in the past four months to 95 percent, according to the London-based Baltic Exchange. Companies that lease ships out in the single-voyage, or spot, market would lose money on ships that they have hired at higher, fixed daily rates.
Industrial Carriers hires vessels on so-called time charters, meaning it commits to paying a fixed daily rental fee for them for a period of several months or years. According to information provided on Industrial Carriers website the company generated sales of about $1 billion last year from leasing out vessels.
The contents of this post are largely narrative of ongoing events, a full economic analysis of the present crisis can be found in my Ukraine Wobbles As The Financial Ground Beneath It Trembles post.