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Wednesday, February 25, 2009

Ukraine Debt Ratings Cut to CCC+ by S&P

Well in some countries it never rains but it pours, as they say. Following the news that Ukraine GDP contracted at an annual rate of 20% in January, today we learn that S&P have cut Ukraine's long-term foreign currency rating to CCC+, seven levels below investment grade. Ukraine’s rating is now the lowest in Europe and at the same level as Pakistan. S&P left the outlook negative, suggesting there may be more to come.

To give us all some idea of what this means contracts to protect Ukraine’s government bonds against default now cost 59.5 percent upfront and 5 percent a year, according to CMA Datavision prices for credit-default swaps today. That means it costs $5.95 million in advance and $500,000 a year to protect $10 million of bonds for five years. The cost is higher than for any other government debt worldwide.

The extra yield investors demand to Ukrainian bonds instead of U.S. Treasuries has risen 10-fold in the past year and at about 32 percentage points is the highest of any country with dollar-denominated bonds except Ecuador, which defaulted in December, according to JPMorgan Chase & Co. EMBI+ indexes.

S&P defines an obligation rated CCC as “currently vulnerable to nonpayment, and is dependent upon favorable business, financial and economic conditions for the obligor to meet its financial commitment on the obligation. In the event of adverse business, financial, or economic conditions, the obligor is not likely to have the capacity to meet its financial commitment on the obligation.”

Fitch Ratings cut Ukraine’s ratings to B, the fifth-highest non-investment grade only two weeks ago and kept the outlook “negative,”. Moody’s said yesterday that there is a good possibility they will cut their Ukraine ratings within three months.

The hryvnia tumbled yesterday, closing at a record low against the dollar, on all the talk about credit downgrades and Eastern Europe's economic problems. The currency dropped 3.4 percent to 9.26 per dollar at 6:10 p.m. in Kiev, below the previous lowest close of 9.10 reached on 18 December last. The hyrvnia has now lost more than 50 percent against the dollar in the past six months.

Ukraine started this crisis with comparatively little state debt, but as the costs of bailouts and recession fighting have mounted the debt has surged upwards. Total state debt increased in November by 33 percent to $22.1 billion from $16.6 billion the previous month, according to recent data from the Ukraine Finance Ministry. In December, the total debt increased by a further 9 percent - up to $24.1 billion. The government initially targeted a budget deficit of 18.8 billion hryvnias ($2.34 billion) or about 2 percent of gross domestic product in 2008. It later cut the gap below 1 percent of gross domestic product, meeting an agreement with the International Monetary Fund which approved a $16.4 billion loan to Ukraine to help stabilize the economy.

Thus Ukraine’s total state debt in 2008 increased by 37 percent to $24.1 billion from $17.6 billion in 2007. It is however still at a pretty low level, being estimated by the IMF in their last standby loan report to rise to some 17.4% of GDP in 2009. The real problem are the mounting liabilities in the private sector, and how these can fall inwards onto state finances.

Update: Wages Fall Rapidly

Average Ukrainian wages fell by 16.8% in January (to UAH 1,665 per month) over the level of December, according to the State Statistics Committee yesterday. The highest average wages were paid out in Kyiv (UAH 2,794 per month), down 21.3% over the level of December 2008. We need to treat this kind of data with some caution, since obviously seasonal factors are at work, and average wages were still up (by 9.4%) over January 2008.

However inflation is still very high in Ukraine, so even with a 10% annual increase in money wages real wages are falling sharply. Inflation was up again in January rising at a 2.9 percent rate over December, which compares with a 2.1 percent rise in December over November. the country's Economy Ministry said. Year on year inflation was running at 22.3% in January.

In addition to the drop in real wages (and the rise in unemployment), there is a problem with unpaid salaries. As of Feb. 1, 2009, the volume of unpaid salaries and wages was up by 35.7% compared to January 1, with the largest volume of wage arrears being observed (rather unsurprisingly) in Donetsk region.

Current Account Surplus

On the other hand Ukraine did have a current account surplus of $500 million in January, according to provisional data released by the acting head of the National Bank, Anatoly Shapovalov yesterday (Wednesday). Shapovalov said the first current account surplus in recent years was due to a steeper decline in imports than in exports. However, the overall balance of payments continues to be in deficit since the flow of capital is neagtive, with loan repayments far exceeding the volume of new loans raised. Thus the he financial account deficit was $2.3 billion in January.

Shapovalov estimated that the balance of payments deficit as coming in at $12 billion for 2009, with the National Bank hoping to receive $9.6 billion from the International Monetary Fund in 2009, which "would be a big help," he said.

Ukraine's current account deficit widened to $11.9 billion or 6.7% of GDP in 2008 from $5.3 billion or 3.7% of GDP in 2007, according to preliminary data from the National Bank. The current account deficit grew as the visible trade deficit rose to $16 billion.

Unsurprisingly, with all this going on, bank lending is reducing, and in January, the total consumer loans were down by an annual 1.8 percent compared to a 7.7 percent rise in December 2008.


Anonymous said...

Dear Edward,

We know about the relative high corporate debt. The question is now, which of these debts can be allowed to "fail" and which not.

It is clear that it is mostly about banks. A lot of banks are foreign owned.

So which banks and which sum is need for the survival of the financial system?

Brian Jones

Anonymous said...

Well, on one hand, Eastern European Economies were advised by IMF etc., to liberalize their Financial Systems and now it is exactly the highest danger ;)

Well, in the long run it will work, the liberalization. But with Rating Agencies, I have in general a bit a problem. Before the crisis, they were not reluctant to rate every CDO with AAA and praising them in their rush of exaggeration, and now they exaggerate on the other way.

I don't doubt that in Ukraine's case it is not justified. But be aware that as soon as one Agency cuts the rating, the other will likely follow. This of course doesn't support investors and they are likely to withdraw their investments, weakening the currency and so on.

I am not so sure about a possible default scenario of Ukraine. Mainly it will depend, what will happen in the financial sector and this his highly set off to foreign banks. So we will see what the EU will do in Eastern Europe. But a default in Ukraine's case could happen, while I am not so sure about the rest of the states in the East in the EU.

Anonymous said...

In January 2009, average wages fell by 16.8% to UAH 1,665 per month in comparison with December 2008, the State Statistics Committee has informed.

The highest rate of average wages was registered in the city of Kyiv at UAH 2,794 per month, a decrease by 21.3% over December 2008.

The lowest rate of average wages was registered in the Ternopil region at UAH 1,207 per month, a decrease by 24.3% compared with December 2008.

Average wages rose by 9.4% or UAH 144 from UAH 1,521 per month in January 2009, compared with January 2008.

As Ukrainian News earlier reported, in December, average wages rose by 9.8% to UAH 2,001 per month compared with November.

Average wages of the Ukrainian population in January, UAH per month

As of Feb. 1, 2009, the volume of unpaid salaries and wages rose by 35.7% compared to January 1, 2009, to UAH 1,525.110 million, the State Statistics Committee has informed.

As of February 1, 2009, the most considerable volumes of wage arrears were observed in Donetsk region amounting to UAH 362.584 million, UAH 106.955 million in Luhansk region and UAH 147.053 million in Kyiv.

In January, the arrears of wages paid from the state and local budgets rose by 6.6%, compared to December 2008, and totaled UAH 7.422 million as of January 1, 2009.

In particular, the arrears of wages paid from the state budget comprised UAH 7.338 million, from local budgets UAH 84,000.

As Ukrainian News earlier reported, as of January 1, 2008, the volume of unpaid salaries and wages fell by 35.3% compared to December 1, 2007, to UAH 1,123.477 million.

Volume of wage arrears in Ukraine (as of February 1. 2009)

Anonymous said...

Wage decrease in this amount while inflation is still high (also due to the weak exchange rate), gives probably massive real income loss..

Small calculation: Nominal wage, -20%, Inflation: 15%

0.8 / 1.15, means that 80% of income divided by 115% (price level), gives (compared with December 2008) a total of real income loss of about 30%, so one 1/3.

Quite a lot, I would say. Or became inflation so low due to lower demand? I think that the weak exchange rate will still keep an inflation rate of at least 10% in the next time, as it is a net importing country.

Edward Hugh said...


"But with Rating Agencies, I have in general a bit a problem."

Well yes, you are right in a way, because they work counter cyclically, upgarding during booms, and downgrading during slumps.

But the problem may not be the ratings agencies so much as the investors, and how they read these ratings, since they tend to look at the headline grade and not read the reports. Basically all three ratings agencies have been warning on Eastern Europe for some time now (as have the IMF).

So a bigger part of the problem are the local banking and political systems, since people clamour to get the better ratings, and then complain when they go back down again.

I don't know whether it would be better never to have gone up in the ratings, look, eg, at Belorus. It doesn't seem to have helped.

The thing is local administrations paid attention to the upgrades and started borrowing, but did not pay much attention to any of the reforms they were told they needed. Then bang, we get a global crisis and it all falls apart.

Edward Hugh said...

Ukraine is very dependent on steel, and the news from china is not good right now (see this reuters piece).

Also a friend sent me the CIMB report on the Baltic Dry Index this morning:

Chinese mills cut production and prices

Strong BDI rally probably coming to an end. The dramatic rise of the Baltic Dry Index over the past two months from a low of below 700 points to above 2,000 is likely to come to an end very soon. Driven up almost entirely by Chinese steel mills’ restart of production during this period, sources within the steel industry now warn that the restocking effort is close to its conclusion.

Mills cutting production.

The Metal Bulletin today reported that many domestic steel mills are cutting production by conducting maintenance on their blast furnaces and rolling mills. It quoted a pig iron researcher as saying that “a lot of small steel mills in Hebei province stopped buying raw materials two weeks ago, and Tangshan Steel has also stopped buying pig iron from its subsidiary plants, and is depending only on their own blast furnaces. Mills didn’t expect the market has slip into a new collapse in such a short time". Shagang is apparently conducting a 20-day maintenance while Tangshan Steel is only running its one hot rolling mill one day a week.

Inventories rising.

Iron ore inventories at Chinese ports rose in the latest reading on 20 February to 59.4m tonnes, from 58.3m tonnes at the end of January (Figure 5). This suggests that demand for iron ore could be waning as steel mills cut production and as unloading onshore begins for the purchases in January.

According to the Metal Bulletin, steel inventories also rose quickly in January and are expected to “affect the stability of market prices” later on, warned the China Iron and Steel Association. Market inventories of long products jumped, with rebar inventories surging 39.1% mom to 2.37m tonnes at the end of January and wire rod jumping 33.3% mom to 861,000 tonnes. Hot rolled coil market inventories grew 14.5% mom from December to 1.69m tonnes in January, while cold rolled plate stocks gained 7.6% mom to 1.01m tonnes and plate stocks advanced 4.4% to 1.1m tonnes.

With end-demand for steel from the property, construction, machining and automobile industries remaining weak, higher inventories of steel and iron ore will mean that production cutbacks are likely, and dry bulk rates will lose the key source of its recent momentum.

Edward Hugh said...

Hello Brian,

"We know about the relative high corporate debt. The question is now, which of these debts can be allowed to "fail" and which not."

Really, I have to say that I am not that much of a specialist on this part. I read the reports, I don't dig into the data, since I am, what could you say, "overstretched" at the present time. I am maintaining some coverage of Ukraine, but am not able to give the topic the attention it merits simply because I don't have time.

Also, I don't have much confidence that anyone in a position to take any decisions in Ukraine is really listening.

Short term solutions are hard to see, and longer term ones (like the population problem) are addressable, but no one gives them much importance.

So all I can say is I am not optimistic. Take your worst case scenario, then add sum.

I discount any possibility of a global recovery this year. In 2010 we will see, but even in the best case the recovery will be slow, and all of this is very bad news for Ukraine, who desperately need to export.

"It is clear that it is mostly about banks. A lot of banks are foreign owned."

And this is precisely the problem, since many of these banks have problems in their own countries, and the bail out problem may well even lead to sovereign downgrades in countries like Sweden, Austria and Italy. In fact the whole EU banking system is now under pressure, so given the old adage that a chain normally breaks at its weakest link, you can imagine where this leaves Ukraine.

Edward Hugh said...


"Wage decrease in this amount while inflation is still high (also due to the weak exchange rate), gives probably massive real income loss.."

I agree, massive. This is obviously why the economy is declining so quickly and why the defaults will be large.

Of course, these are "official" wages. It could be some employers have gone back to under the counter activity, and thus the wages look lower than they really are, "blackening" following the earlier "whitening". This has certainly been happening elsewhere, eg Italy.

But the end result is that the government gets less taxes, and the budget deficit grows, which is what sends the rating down. So it is a vicious circle.

"Or became inflation so low due to lower demand? I think that the weak exchange rate will still keep an inflation rate of at least 10% in the next time, as it is a net importing country."

Definitely. The lack of institutions with the capacity to carry out measured devaluation and control inflation is the biggest underlying cause of the severity of the problem here and in Russia, not the rating agencies.

So yes, expect more devaluation and more double digit inflation, despite the sharp contraction in internal demand.

Edward Hugh said...

Hi again,

"In January 2009, average wages fell by 16.8% to UAH 1,665 per month in comparison with December 2008, the State Statistics Committee has informed."

I think we need to be careful here, since these are month on month numbers, are there may be seasonal factors at work.

"Average wages rose by 9.4% or UAH 144 from UAH 1,521 per month in January 2009, compared with January 2008."

This is the valid comparison, but since prices yoy were up by 23%, then there is a drop of over 13% in real wages. Still a lot. I am updating the post with this.

Anonymous said...

In 2008, real gross domestic product increased by 2.1 percent over 2007 to Hr 950 billion, according to the State Statistics Committee. This is roughly $120 billion. The Cabinet of Ministers approved the major macroeconomic indic

The economy is expected to shrink 6 percent this year, by some forecasts.

Anonymous said...

AMID the wreckage of Latvia’s retailing industry, which has declined 17% year on year according to the latest figures, one item is selling well: T-shirts with seemingly mysterious slogans such as “Nasing spesal”. Latvians are glad to have something to laugh about, even if it is only their finance minister, Atis Slakteris. In an ill-judged foreign television interview, using heavily accented and idiosyncratic English worthy of the film character Borat, he described his country’s economic problems as “nothing special”.

Put mildly, that was an original interpretation. Fuelled by reckless bank lending, particularly in construction and consumer loans, Latvia had enjoyed a colossal boom, with double-digit economic growth and a current-account deficit that peaked at over 20% of GDP. Conventional wisdom would have suggested applying the brakes hard, by tightening the budget and curbing borrowing. But the country’s rulers, a lightweight lot with close ties to business, rejected that. Fast economic growth made voters feel that European Union membership was at last producing practical benefits, after a disappointing start when tens of thousands of Latvians went abroad in search of work, leaving rural villages and small towns depopulated.

The central assumption, in Latvia and many other countries in or near the EU, was that convergence with rich Europe’s living standards and other comforts was inevitable. Lending in foreign currency went from 60% of the total in 2004 to 90% in 2008. Why pay high interest rates in the local currency, the lat, when the cost of a euro loan was so much cheaper? In a few years Latvia would surely join the euro anyway. Similarly, worries about financing the inflows were dismissed: Swedish banks would no more abandon their subsidiaries in Latvia than they would pull out of, say, southern Sweden.

Last year tested those assumptions nearly to breaking point. First, Latvia’s housing bubble popped. Then the main locally owned bank, Parex, went bust and had to be nationalised, amid fears that it could not pay two syndicated loans due this year. In December Latvia accepted a humiliating €7.5 billion ($9.56 billion) bail-out led by the IMF.

The big cuts in social spending that the package entailed led to vigorous public protests. Now the government has resigned. At a time when strong leadership and public trust are needed more than ever, the country’s squabbling and discredited politicians look hopelessly out of their depth. Latvia is an economic pipsqueak, with just 2.4m people. But the rest of the region is watching nervously, fearful that more bad news from the Baltics could bring others crashing down too.

It is easy to be pessimistic. This is indeed the worst economic crisis since the collapse of the communist planned economies and the wrenching process of privatisation, liberalisation and stabilisation that followed. The main ex-communist economies are likely to contract by 3% this year, according to Capital Economics, a consultancy. Yet the picture is not uniform. Only a few countries have needed an IMF bail-out. One is Latvia, whose economy is set to contract by at least 12% this year, and whose credit rating has just been downgraded by Standard & Poor’s to junk. Another is Hungary, burdened with a larger debt-to-GDP ratio than almost any other new EU member. It received $25 billion in October and faces a contraction of up to 6%. A third is Ukraine—chaotically run, corrupt and badly hit by the slowdown in its main export market, Russia. Ukraine’s IMF deal brought it $4.5 billion in November. But a second tranche of $1.9 billion is stuck; the deal is unravelling as politicians squabble over spending cuts. Its economy is likely to shrink by 10% this year. Other countries with IMF packages agreed or pending include Belarus (a Russian ally which is still expected to see growth this year), Georgia (which was bailed out after last year’s war with Russia) and Serbia.

Most other countries in the region are faring much better, though. Poland—by far the largest economy of the new EU members—is nowhere near collapse. Unlike its central European neighbours, it is big enough not to depend chiefly on exports to the rest of the EU. By European standards, its public finances are in fairly good shape. Its debt-to-GDP ratio is below 50%. Growth will be negligible, or slightly negative, but nobody is forecasting a big decline. Some Polish firms and households have taken out foreign-currency loans—but the figure is around 30% of all private-sector lending, compared with twice that in Hungary.

The second-biggest economy, the Czech Republic, is in good shape too. Its economy may shrink by 2%, but it has a solid banking system and low debt. Its neighbour Slovakia is in better shape still: it managed to join the euro zone this year. Like Slovenia, which joined two years ago, Slovakia can enjoy the full protection of rich Europe’s currency union, rather than just the indirect benefit of being due to join it some day.

Farther afield, the picture is very different. For the poorest ex-communist economies, the problem is not financial meltdown. They lack much to melt. Their exports are raw materials, agricultural products and people. In six countries, money sent home by foreign workers counts for more than 10% of GDP (in Tajikistan and Moldova it is more than 30%). Outsiders who agonise over the Latvian lat or Hungarian forint are rarely bothered with worries about the somoni (Tajikistan), leu (Moldova) or manat (Turkmenistan).

That highlights an important problem. Outsiders tend to lump “the ex-communist world” or “eastern Europe” together, as though a shared history of totalitarian captivity was the main determinant of economic fortune, two decades after the evil empire collapsed. Though many problems are shared, the differences between the ex-communist countries are often greater than those that distinguish them from the countries of “old Europe” (see table).

They range from distant, dirt-poor despotic places to countries in the EU that are not just richer than some of the old ones, but have better credit ratings, sounder public finances and stronger public institutions. In almost any contest for good government, stability or prosperity, Slovenia (under a sort of communism until 1991) looks better than Greece, which invented democracy and was never communist.

The thirst for capital

Historical and geographical quibbles aside, what the ex-communist countries have shared over the past decade is a mighty thirst for capital. Having missed out on decades of growth and integration with the outside world, almost all (a few oddballs in Central Asia aside) are trying to catch up. Money from abroad has come in from borrowing on the bond market, from foreign direct investment or from selling shares. Most often it has come through bank loans.

At one extreme is Russia, which enjoyed huge external surpluses thanks to its wealth of raw materials. But its big companies borrowed lavishly on the strength of that, creating a potential short-term debt problem. Russian corporate borrowers have to pay back around $100 billion this year. At the other extreme lie countries such as Slovakia. They attracted billions from foreign car manufacturers, drawn by a skilled workforce, low taxes and decent roads in the heart of high-cost Europe.

Countries that relied chiefly on foreign direct investment are the least vulnerable now. The new factories may shut down. But it is harder for that capital to flee. Those that rely on foreign investors buying their bonds, such as Hungary, are the most vulnerable: their fortunes vary with every twitch of a trader’s fingers. In the middle are those that rely on lending from foreign banks to their local subsidiaries. That looked solid in the boom years, as Western banks scrambled to win market share by offering good terms to borrowers and lenders in the fastest-growing bit of Europe. It is still highly unlikely that any Western bank will pull the plug on a subsidiary anywhere—even in troubled Ukraine.

But nerves are jangling. The ex-communist countries have survived the first phase of the crisis, thanks to their own policies and some external support. The second phase, in which the rich world is turning stingier and possibly more protectionist and lenders are scurrying to safety, may be harder. The ex-communist economies must repay or roll over a whopping $400 billion-odd in short-term borrowings this year. Coupled with the lazy but easy lumping of nearly three dozen countries together, that creates the region’s biggest danger: contagion (see article). In other words, failure in one place sparks a disaster in another, even though it may be far away and have the same problem in a far more manageable form.

Contagion could happen in many ways. One is if depositors lose confidence that their savings are safe. So far, Western-owned banks have enjoyed rock-solid credibility: more so, in many cases, than governments or other public institutions. But that confidence could be undermined. If only one foreign bank pulls the rug from under one local subsidiary, leaving depositors stranded, it will cloud perceptions of banks’ reliability across the region. The most dangerous kinds of bank runs would be those in which depositors try to pull out either their foreign currency, or local currency which they would then attempt to convert into hard currency. In some countries that could overwhelm the ability of the central bank to support the financial system.

Another weak point is where shareholders take fright. If a foreign bank with big exposure to the region—Swedish, Austrian or Italian—needs to raise more capital but finds that outsiders think its loan book is too risky, what happens? The price of rescue may be that it sheds a troubled foreign subsidiary. Signs of shareholder twitchiness are growing (see chart).

For now, the most likely source of contagion is collapsing currencies. The paradox is that for countries with floating exchange rates, an orderly depreciation would in normal circumstances be a good way of cushioning an external shock, such as the slump in export markets now hitting the ex-communist economies. It stokes competitiveness and, along with lower interest rates, it lays the foundations for a return to growth. Governments with sound public finances might also consider running a looser fiscal policy to counteract the downturn.

Propping up the currency

For most of the countries in the region, such a textbook response is out of the question. Some have currency boards, or pegged exchange rates. In the Baltic states these have been the centrepiece of economic policy for more than 15 years. Abandoning them would not only bankrupt big chunks of the economy that have borrowed in euros. It would also be a huge psychological blow to public confidence in the whole idea of independent statehood. These countries have suffered the most painful part of being in the euro zone—the inability to devalue and regain competitiveness—without getting all the benefits.

Countries with floating exchange rates have a bit more room for manoeuvre. Their problem (a big one in Hungary, a lesser one in Romania and Poland) is that falling exchange rates may bankrupt the firms and households which have, in past years, taken out unwise loans in foreign currencies, chiefly euros and Swiss francs. That was, in effect, a convergence play. If you believed your country was heading for the euro zone some time in the next few years, then why not take advantage of the low interest rates there, rather than suffer the higher ones in your domestic currency?

What seemed a minor risk back then now looks painfully mistaken. For those earning forints or Polish zloty, the big swings in exchange rates in recent weeks have sent the size of both loans and repayments spiralling upwards. The zloty has dropped 28% and the forint 22% against the euro since the middle of last year. If the East Asian crisis of 1997 is any guide, these and other currencies may yet have further to fall.

This risk of a currency collapse will limit these countries’ options. So far many big central European countries have cut interest rates heavily to try to boost their economies—Poland’s central bank cut its policy rate again this week. But currency weakness will limit their room for manoeuvre. The Czech, Hungarian and Polish central banks issued a co-ordinated statement this week hinting they might intervene to support their exchange rates. But that route is tricky. Russia has blown half its reserves in a series of unsuccessful attempts to try to prop up the rouble.

Spending and tax policies would be another way of dealing with a downturn. But these are constrained, too. Those countries with a chance of joining the euro are scrambling to cut their budget deficits to get them in line with the 3% of GDP target set by the EU’s Maastricht treaty. Yet that aggravates the problem. The danger for Latvia and Ukraine is a downward spiral, where cuts in public spending damage the economy in a way that helps to entrench the deficit.

So far, the economic crisis has not translated into populist or protectionist politics. It is the east European countries that have been demanding that the rest of the EU stick by the rules of the single market. Their development over the past decades has been thanks to the free movement of capital, goods and labour. They would like a lot more of it: in a contest to subsidise industries, rich countries always win.

But that stance will not hold indefinitely if things get worse. Willem Buiter, a prominent economist, believes it is only a matter of time before some of the ex-communist countries introduce capital controls. That, in theory, would allow them to concentrate on stabilising their economies without worrying so much about the external value of their currency. If voters find the economic pain of adjustment unbearable, politicians can pass laws that will make foreign-currency borrowings repayable in local currency. That would be met with fury by the foreign banks, who would in effect see their loan books expropriated. But it could happen.

Against that background, what can be done? The east European countries are, belatedly, co-ordinating their approach within the EU, holding their own mini-summit on March 1st. They want to embarrass countries such as France for what they see as its protectionist approach to the crisis. They are supporting each other: the Czech Republic and Estonia were among those contributing to the Latvian bail-out.

But even co-ordinated local efforts are unlikely to make much difference, given the scale of the problem. The real lead, and the real money, must come from outside the region. That brings into play a slew of political problems. Having trumpeted their free-market principles in past years, and dismissed the stodgy approach of countries such as Germany and France, the new EU members from eastern Europe are now turning to old Europe in the hope that it can hurry up the flow of EU structural funds to counteract the downturn, bail out or prop up over-exposed banks in places like Austria, and stretch the rules of the European Central Bank to let it provide support to countries outside the euro zone. The case for such measures is strong, and it is in the interest of all Europe that contagion is contained. But that does not mean that it will happen.
(The Economist)

Anonymous said...

Ukraine Teeters as Citizens Blame Banks and Government

KIEV, Ukraine — Steel and chemical factories, once the muscle of Ukraine’s economy, are dismissing thousands of workers. Cities have had days without heat or water because they cannot pay their bills, and Kiev’s subway service is being threatened. Lines are sprouting at banks, the currency is wilting and even a government default seems possible.

Ukraine, once considered a worldwide symbol of an emerging, free-market democracy that had cast off authoritarianism, is teetering. And its predicament poses a real threat for other European economies and former Soviet republics.

The sudden, violent protests that have erupted elsewhere in Eastern Europe seem imminent here now, too. Across Kiev last week, people spoke of rising anger about the crisis and resentment toward a government that they said was more preoccupied with squabbling than with rallying the country.

The sign held by Vasily Kirilyuk, an unemployed plumber camped out with other antigovernment demonstrators here in the past week, summed up the pervasive frustration: “Get rid of them all,” it said.

Mr. Kirilyuk did not hesitate to take that further. “There will be a revolt,” he said. “And people will come because they are just fed up.”

Mr. Kirilyuk, 29, was standing in the same central square where throngs in 2004 carried out the Orange Revolution, a seminal event that brought to power a pro-Western government in Ukraine. He said he was a fervent supporter then of the protesters, but now he and a few dozen others who have set up tents here are demanding that the heroes of that revolution step down.

It is not hard to understand why world leaders are increasingly worried about the discontent and the financial crisis in Ukraine, which has 46 million people and a highly strategic location. A small country like Latvia or Iceland is one thing, but a collapse in Ukraine could wreck what little investor confidence is left in Eastern Europe, whose formerly robust economies are being badly strained.

It could also cause neighboring Russia, which has close ethnic and linguistic ties to eastern and southern Ukraine, to try to inject itself into the country’s affairs. What is more, the Kremlin would be able to hold up Ukraine as an example of what happens when former Soviet republics follow a Western model of free-market democracy.

“Ukraine is a linchpin for stability in Europe,” said Olexiy Haran, a professor of comparative politics at Kiev Mohyla University. “It is a key player between the expanding European Union and Russia. To use an alarmist scenario, you could imagine a situation in Ukraine that Russia tried to exploit in order to dominate Ukraine. That would make for a very explosive situation on the border of the European Union.”

That Ukraine can cause problems for Europe was highlighted in January when Ukraine engaged in a dispute with Russia over how much it would pay Russia for natural gas, as well as over gas transport to the rest of Europe. The Kremlin shut off the gas for several days, and some European countries went without heat. The Kremlin also shut off gas to Ukraine in 2006 in a pricing dispute.

While Ukraine’s economy is dependent on exports of steel and chemicals, which have plummeted, the crisis has cut deeply because people are disillusioned with the government.

President Viktor A. Yushchenko, a leader of the Orange Revolution, who garnered attention around the world in 2004 when his face was scarred in a poisoning episode, is so widely scorned that a recent poll found that 57 percent of people wanted him to resign.

His rivals have also lost popularity, as the public has become exasperated by years of political bickering. In February, the International Monetary Fund refused to release the next installment of a $16.4 billion rescue loan to Ukraine because the government would not adhere to an earlier agreement to pare its budget.

Around the same time, Ukraine’s finance minister resigned, saying that the job had been “hostage to politics.”

On Friday, the monetary fund projected that Ukraine’s economy would shrink by 6 percent this year, and said that it was continuing to work with the government to find a way to disburse the rest of the rescue loan.

A presidential election is coming, probably to be held next January, and this prospect is making politicians, especially Prime Minister Yulia V. Tymoshenko, reluctant to adopt an austerity program that might alienate voters.

Mr. Yushchenko and Ms. Tymoshenko were pro-Western allies during the Orange Revolution, but have bitterly feuded since then, and he fired her once. A third rival, Viktor F. Yanukovich, a former prime minister who heads an opposition party that favors closer ties with Russia, also wants to be president.

On Friday, Mr. Yushchenko and Ms. Tymoshenko held a public meeting in an effort to demonstrate that they were working together. Mr. Yushchenko said he wanted “to show the readiness of all sides to take political responsibility for decisions which today are not easy.”

Even so, the two did not announce further anticrisis measures.

All over Kiev have been signs that tensions are building.

On the city’s outskirts, more than 200 tractor-trailer rigs were parked Thursday, their drivers threatening to block roads if the government did not help them with their debts, which they said were caused in part by the drop in the value of Ukraine’s currency, the hryvnia.

The truckers dispersed Friday, only after the government said it would try to address their demands, but they said they would be back soon if they were ignored.

“The government is to blame for all this,” said a trucker, Viktor V. Zarichnyuk, 26, who had been at the protest for 12 days. “We want the government and the national bank to agree that the money allocated by the International Monetary Fund, at least part of it, should go to regular people.”

At a branch of the Rodovid Bank across town, a tense crowd gathered Friday morning. The bank, close to failing, was allowing withdrawals of only $35 a day. And so people, some of them pensioners fearful for their life savings, have been trooping each day, ever more aggravated, to try to get what they can.

“Every day we come here — it’s insulting — in the cold and line up,” said Alevtina A. Antonyuk, 58, an engineer. “They are nothing at this bank but a bunch of thieves.”

Who is to blame, she was asked. Before she could answer, Dmitri I. Havrilkiv, 78, a retired crane operator, interrupted.

“The government has to be replaced,” he shouted. “They just can’t handle it!” (NY Times)

Anonymous said...

Russia Tops Stock Gains, Strengthening Putin as Ukraine Tumbles
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By Emma O’Brien and Laura Cochrane

March 2 (Bloomberg) -- Russia, the worst-performing major stock market in 2008, was Europe’s best last month as the ruble rose and reserves stabilized. Every neighboring market crumbled.

The Micex equity index climbed 6.6 percent in February as the world’s second-biggest oil producer stopped speculators from driving down the ruble and depleting its $382 billion of foreign exchange reserves. In Ukraine, the central bank’s holdings fell 24 percent since August and the benchmark PFTS Index lost 21 percent last month. Latvia’s OMX Riga Index dropped 8 percent.

While Russia’s government said the economy will contract for the first time in a decade and currency reserves are down 36 percent from August, the nation’s relative strength is raising Prime Minister Vladimir Putin’s influence over former Soviet states. Ukraine discussed borrowing $5 billion. Kazakhstan wants Russia to buy ailing BTA Bank. Belarus is asking for $3 billion in loans, on top of $2 billion granted last year.

“Russia isn’t looking at a straight-line deterioration into oblivion,” said Kieran Curtis, who helps manage $800 million in emerging-market fixed-income assets in London at Aviva Investors Ltd. “It has enough liquid assets to take stakes in all kinds of things in the former Soviet states.”

Last year, international investors fled Russia after its war with Georgia, a 77 percent decline in the price of Urals crude, and the global credit crisis sent the Micex down 68 percent. Speculators targeted the ruble, driving it 30 percent lower against the dollar and 20 percent versus the euro. Bank Rossii spent $216 billion to keep the currency’s seven-month drop from turning into a rout.


Standard & Poor’s cut Russia’s credit rating in December by one level to BBB, the second-lowest investment-grade ranking. The government expects to run a budget deficit of about 8 percent of gross domestic product this year.

The central bank steadied the ruble, which gained 0.5 percent against the dollar last month, by pledging to raise interest rates and curtailing loans that banks were using to bet against the currency. Investors anticipate government plans to provide $200 billion in loans and reduce taxes will bolster the economy and push up the Micex, which is down 66 percent from its record high in May.

Russia is “still better off than others, mostly because of the reserves,” said Beat Siegenthaler, chief emerging-markets strategist in London for TD Securities.

Political Rivalry

Eighteen years after the collapse of the Soviet Union depleted Moscow’s power, Ukraine needs foreign funds to close its $12.3 billion current-account deficit after the global recession curbed demand for steel and international credit dried up. The currency, the hryvnia, dropped 45 percent against the dollar in the past six months. The country’s 22 percent inflation rate is the highest in continental Europe.

Ukraine estimates a budget deficit at 5 percent of GDP for 2009 and risks violating terms of a $16.4 billion International Monetary Fund loan agreement. Foreign-currency reserves fell 24 percent since August and are below the $30.2 billion the IMF required. The second portion of the credit, due in January, hasn’t been approved.

The country has also been weakened by the political rivalry between Prime Minister Yulia Timoshenko and President Viktor Yushchenko, who led the so-called Orange Revolution in late 2004 when the country’s pro-Russian government was peacefully overthrown.

Ukraine tried to increase ties with western Europe and the U.S., seeking membership to the North Atlantic Treaty Organization last year and the European Union. Russia shut off natural gas shipments through Ukraine over a price dispute in January.

Flexing Muscle

Now, the sinking economy is giving Putin, 56, the advantage. Timoshenko requested aid from Russia, the U.S., the European Union, China and Japan this year and Russia gave a “positive response,” she said Feb. 9. Yushchenko shut down what he called “unauthorized” negotiations for a loan.

“This crisis is the best opportunity that Russia’s had to rein in Ukraine and make sure nobody else moves in on their backyard for a long time,” said Chris Weafer, chief strategist at Moscow-based bank UralSib.

Interfax news agency reported last week that Russia hasn’t started talks to provide a loan, citing Russian Finance Minister Alexei Kudrin.

Russia may be willing to draw on its reserves to prop up neighboring economies, said Ivan Tchakarov, an economist at Nomura Holdings Inc. in London. “Ukraine will require more than the $16 billion from the IMF, so they will need Russian money,” he said. “It’s the perfect time for Russia to flex its muscles.”

Default Risk

Russia’s foreign-currency debt is rated eight levels higher than Ukraine. S&P cut Ukraine’s credit rating by two levels last week to CCC+, seven below investment grade and the lowest in Europe. S&P also cut Latvia to below investment grade.

Investors demand a record 27.4 percentage points more in yield on Ukrainian government bonds than Russian, compared with a gap of 3 percentage points six months ago, according to JPMorgan Chase & Co. indexes. As recently as 2003, Ukraine’s bonds yielded 2 percentage points less than Russia’s.

Contracts to protect Ukraine government bonds against default imply a 69.6 percent chance Ukraine will fail to pay its debt in the next two years and 91.8 percent odds in the next five years, according to CMA Datavision prices for credit-default swaps last week.

Kazakhstan is seeking to sell its 78 percent stake in Almaty-based BTA Bank, the country’s largest, to Russia’s government-controlled lender OAO Sberbank, Arman Dunayev, deputy chief of Kazakhstan’s state oil fund, said Feb. 2.

Belarus, Kyrgyzstan

Belarus, which borders Russia and Poland, has a $2.46 billion credit line from the IMF in addition to loans from Russia.

Kyrgyzstan got a $2 billion loan from Russia and was promised a further $150 million in economic aid on Feb. 3. The same day, Kyrgyzstan’s government announced it would shutter the military base the U.S. Air Force has used for supplying troops in Afghanistan.

“I welcome Russia’s efforts to try and create stronger economic linkages because for investors it’s stabilizing,” said Jerome Booth, head of research at Ashmore Investment Management Ld. in London, which manages $36 billion of emerging-market assets. “It’s looking for relationships it wants to solidify in the region.”

To contact the reporters on this story: Emma O’Brien in Moscow at eobrien6@bloomberg.net; Laura Cochrane in London at = lcochrane2@bloomberg.net
Last Updated: March 1, 2009 16:08 EST

Anonymous said...

Ukraine risks unrest as ills worsen
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By Stefan Wagstyl and Roman Olearchyk, Financial Times, 2 Mar 2009

Olexander Pavlenko, a young computer programmer, is one of tens of thousands of Ukrainians who cannot get their money out of the bank.

He stood in line in Kiev at Nadra Bank and Ukrprombank, two big troubled banks, planning to withdraw more than $10,000 (€7,950, £7,125). But like many others, he was told the cash was not available.

"I stood in line a couple times with other bank clients who were protesting, crying and screaming. But the bank told me: 'Sorry, we simply don't have the money now and can't help you.'"

With about nine banks now under the central bank's special control, Ukrainians are increasingly worried.

Even those with their money in apparently solid banks, including those controlled by west European banking groups, are concerned because the central bank has banned the early redemption of term deposits, the most popular form of saving in Ukraine.

Altogether, hryvnia bank deposits have dropped 20 per cent since September and those in foreign currency 10 per cent.

"This is very serious," said Olexander Suhonyako, president of the Association of Ukrainian Banks.

The growing discontent among bank clients is matched by other signs of public anger at the impact of the global crisis – and at the seeming inability of the country's divided leaders to respond effectively.

Recent weeks have seen protests by truck drivers complaining about taxes and the dramatic decline of the hryvnia, which has complicated the repayment of foreign currency vehicle loans.

Meanwhile, the owners of street kiosks in Kiev successfully demonstrated against the city's plans to take over their stalls.

But with demonstrations drawing only up to 5,000 people, the authorities are confident there is no serious threat to stability.

They say Ukraine is remarkably calm given the country's economic problems. Gross domestic product growth is forecast to contract 5-10 per cent in 2009, while unemployment is rising and non-payment of wages is becoming more common.

But with political leaders focused on the forthcoming presidential elections due before the end of the year, some observers fear that the protests will become bigger.

Oleksiy Haran, a political science professor at Kiev's Mohyla University, says: "If [the economic situation] worsens, if more banks run into trouble, and if more layoffs pile up, then I would expect large crowds to materialise. This will be dangerous for a country that is struggling already to deal with the economic crisis."

There seems to be no end to the disputes between Viktor Yushchenko, president, and Yulia Tymoshenko, his prime minister.

Much now depends on the implementation of the $16.5bn package assembled by the International Monetary Fund, including money for bank refinancing. After disbursing $4.5bn last autumn, the IMF suspended further loans after a policy disagreement with Kiev.

But Mr Yushchenko and Ms Tymoshenko pledged at the weekend to co-operate with each other and the IMF on implementing reforms.

Meanwhile, the IMF agreed to relax its desired deficit target from less than 1 per cent of GDP to about 3 per cent, in the light of the deepening recession.

Co-operating with the IMF will allow Ukraine not only to secure loans but also support from other international institutions including the World Bank and multinational banks, which have pledged to back their local subsidiaries.

On Monday, Austria's Raiffeisen International promised to support Aval, its Ukrainian affiliate.

Hryhoriy Nemyria, deputy prime minister, insists Ukraine "is not a basket case". Ceyla Pazabasioglu, the IMF's Ukraine mission chief, agrees, saying the country's difficulties are not "insurmountable".

But investors are not so sure. Ukraine's credit default swap rate – a risk measure – stands at around 3,700, compared with about 1,000 for Latvia and 560 for Hungary, two other east European states on IMF support.

Every week seems to bring a new crisis – the next could come this weekend, when Kiev is due to pay a $400m bill to Gazprom, the Russian gas monopoly.


Road from the Orange revolution

Jan 2005 Viktor Yushchenko sweeps to power in the Orange Revolution

Sept 2005 Mr Yushchenko sacks Yulia Tymoshenko, his prime minister, after repeated disputes

March 2006 Parliamentary elections and appointment of Viktor Yanukovich as prime minister

2007 Efforts by Mr Yushchenko and Mr Yanukovich to co-operate collapse and new elections are called. Ms Tymoshenko returns to power

2003-2007 Strong growth, with GDP rising at an annual average of 8 per cent

2008 GDP growth slows to 2 per cent. Gloom spreads into property and banking

March 2009 Economy worsens, with a decline of at least 6 per cent in growth predicted this year
(Financial Times)

Anonymous said...

Outlook for 2009-10
The domestic political scene will remain highly uncertain and prone to instability in the run-up to the presidential election that is due in early 2010.
Relations with Russia are expected to remain tense until the presidential election. The two leading contenders, Viktor Yanukovych and Yuliya Tymoshenko, are likely to adopt a friendlier position than the incumbent.
We assume that the authorities will take sufficient policy steps to trigger the release of further tranches of IMF support in 2009-10. However, the risks to this outlook are considerable, given the lack of political consensus.
There will be a deep recession in 2009, with real GDP forecast to contract by 6%, and to recover only slowly in 2010. The main downside risks to this outlook stem from the uncertain picture for the hryvnya.
The currency will weaken sharply in 2009. The current-account deficit is forecast to narrow as a result of reduced import demand.

Monthly review
A bitter row with Russia over gas supplies for 2009 erupted into a Europe-wide energy crisis in January 2009. A large number of European countries suffered severe gas shortages because of the interruption to transit flows.
On January 19th the prime minister, Ms Tymoshenko, signed a deal with her Russian counterpart, Vladimir Putin, to allow gas to begin flowing again.
Under the deal, from 2009 onwards Ukraine will pay a price linked to the so-called European gas price, with a 20% discount in 2009, followed by application of the full rate in 2010.
We estimate that the deal will translate into an average gas import price of US$235 per 1,000 cu meters in 2009.
Although there have so far been few signs of social unrest in the country, there are signs that the dire economic situation is beginning to erode Ms Tymoshenko's popular support.
The governor of the National Bank of Ukraine (NBU, the central bank), Volodymyr Stelmakh, has taken a leave of absence, amid growing political pressure for his resignation.
Real GDP slowed to a preliminary 2.1% in 2008, with output contracting by 10% year on year in December. Inflation averaged 25% in 2008.
The domestic banking sector has suffered from a rise in bad loans and a shrinking deposit base.

Anonymous said...

Although the Economist Intelligence Unit does not expect Ukraine to make significant progress towards NATO membership, at least in 2009-10, tensions with Russia are likely to remain high running up to the presidential election due in January 2010. The incumbent, Viktor Yushchenko, is likely to be replaced by a more Russia-friendly candidate at the election.
Domestic political stability will remain elusive, especially in the first part of the forecast period, owing to the severe financial and economic crisis, and the approach of the presidential election. Consensus will be hard to find on vital issues, such as tackling the crisis and clarifying the division of constitutional powers.
Following the spread of the global financial market meltdown to Ukraine in October 2008, the authorities have reached a deal with the IMF on a US$16.4bn stand-by loan to provide balance-of-payments support. We assume that enough will be done to prompt the release of further tranches of IMF support in 2009-10. However, the risks to this outlook are considerable.
In the light of the sharp drop in external demand and prices for steel, domestic financial instability, and the measures that the authorities will need to pursue in order to restore macroeconomic stability, the economy is expected to experience a deep recession in 2009 and only slow growth in 2010. Growth should pick up in the second half of the forecast period to an annual average of around 4.5%.
The current-account deficit is forecast to decline over the first years of the forecast period as a contraction in household consumption and investment reduces demand for imports. The deficit is likely to widen moderately during the second half of the forecast period as domestic demand picks up.
The currency is forecast to be substantially weaker in 2009, owing to a slump in steel exports and sharply lower access to external financing, as well as reduced inflows of foreign direct investment (FDI). A broad stabilisation of the exchange rate is expected for the remainder of the forecast period as the current-account deficit narrows and as the external financial environment eases.

More information on:http://www.economist.com/countries/Ukraine/PrinterFriendly.cfm?Story_ID=13088120

Anonymous said...

Kiev factions call truce in move to win IMF backing
By Roman Olearchyk in Kiev and Stefan Wagstyl in London
Published: March 2 2009 02:00 | Last updated: March 2 2009 02:00
The International Monetary Fund has welcomed moves by Ukraine's divided leadership to co-operate on economic reforms needed to secure an aid plan for pulling the country out of its financial crisis.

In a letter sent this weekend to the fund, Viktor Yushchenko, president, pledged to put aside differences with Yulia Tymoshenko, premier, and other rivals and adopt the rescue programme. "Time is against us. [But] with this step Ukraine is demonstrating its readiness to resume dialogue with the IMF," Mr Yushchenko said.

Welcoming the news, Ceyla Pazarbasioglu, the IMF mission chief, told the Financial Times: "For anybody who knows Ukraine, this is progress."

But she added that Kiev now had to implement reforms, including restructuring the 2009 budget to take account of deteriorating economic conditions. Gross domestic product is forecast to fall 6 per cent this year.

A $4.5bn (€3.5bn, £3.1bn) disbursement last autumn from a $16.5bn IMF loan temporarily stabilised Kiev's financial system. But the IMF delayed further loan disbursements amid political battles ahead of Ukraine's forthcoming presidential campaign.

An IMF mission is expected in Kiev soon for further talks. Fund officials have revised their position on a key issue - the budget deficit - in the light of the worsening economic outlook. They have dropped their insistence on a budget deficit of 0-1 per cent of GDP, saying they could now accept 3 per cent, as proposed by Kiev, as long as other conditions were met. These include reform of foreign exchange policies and an overhaul of the troubled banking sector.

A resumption in IMF lending would also ease access to financing from other multilateral lenders, including the World Bank and the European Bank for Reconstruction and Development, and encourage foreign banks, which control nearly half Ukraine's banking sector, to increase support for their subsidiaries. Ukraine is also seeking up to $5bn in loans from countries including the US, Japan, European Union states and Russia.

Bankers in Kiev say resumption of the IMF loan is needed to shore up confidence. Ukraine's currency lost some 40 per cent of its value last year, despite central bank intervention.

Figures show that hryvnia deposits by citizens and businesses have fallen 20 per cent since September, despite a freeze on early withdrawals from term deposits. Foreign currency deposits during the period fell by 10 per cent to $20bn.

Anonymous said...

March 2, 2009
Revenge of the Glut

By Paul Krugman
Remember the good old days, when we used to talk about the “subprime crisis” — and some even thought that this crisis could be “contained”? Oh, the nostalgia!

Today we know that subprime lending was only a small fraction of the problem. Even bad home loans in general were only part of what went wrong. We’re living in a world of troubled borrowers, ranging from shopping mall developers to European “miracle” economies. And new kinds of debt trouble just keep emerging.

How did this global debt crisis happen? Why is it so widespread? The answer, I’d suggest, can be found in a speech Ben Bernanke, the Federal Reserve chairman, gave four years ago. At the time, Mr. Bernanke was trying to be reassuring. But what he said then nonetheless foreshadowed the bust to come.

The speech, titled “The Global Saving Glut and the U.S. Current Account Deficit,” offered a novel explanation for the rapid rise of the U.S. trade deficit in the early 21st century. The causes, argued Mr. Bernanke, lay not in America but in Asia.

In the mid-1990s, he pointed out, the emerging economies of Asia had been major importers of capital, borrowing abroad to finance their development. But after the Asian financial crisis of 1997-98 (which seemed like a big deal at the time but looks trivial compared with what’s happening now), these countries began protecting themselves by amassing huge war chests of foreign assets, in effect exporting capital to the rest of the world.

The result was a world awash in cheap money, looking for somewhere to go.

Most of that money went to the United States — hence our giant trade deficit, because a trade deficit is the flip side of capital inflows. But as Mr. Bernanke correctly pointed out, money surged into other nations as well. In particular, a number of smaller European economies experienced capital inflows that, while much smaller in dollar terms than the flows into the United States, were much larger compared with the size of their economies.

Still, much of the global saving glut did end up in America. Why?

Mr. Bernanke cited “the depth and sophistication of the country’s financial markets (which, among other things, have allowed households easy access to housing wealth).” Depth, yes. But sophistication? Well, you could say that American bankers, empowered by a quarter-century of deregulatory zeal, led the world in finding sophisticated ways to enrich themselves by hiding risk and fooling investors.

And wide-open, loosely regulated financial systems characterized many of the other recipients of large capital inflows. This may explain the almost eerie correlation between conservative praise two or three years ago and economic disaster today. “Reforms have made Iceland a Nordic tiger,” declared a paper from the Cato Institute. “How Ireland Became the Celtic Tiger” was the title of one Heritage Foundation article; “The Estonian Economic Miracle” was the title of another. All three nations are in deep crisis now.

For a while, the inrush of capital created the illusion of wealth in these countries, just as it did for American homeowners: asset prices were rising, currencies were strong, and everything looked fine. But bubbles always burst sooner or later, and yesterday’s miracle economies have become today’s basket cases, nations whose assets have evaporated but whose debts remain all too real. And these debts are an especially heavy burden because most of the loans were denominated in other countries’ currencies.

Nor is the damage confined to the original borrowers. In America, the housing bubble mainly took place along the coasts, but when the bubble burst, demand for manufactured goods, especially cars, collapsed — and that has taken a terrible toll on the industrial heartland. Similarly, Europe’s bubbles were mainly around the continent’s periphery, yet industrial production in Germany — which never had a financial bubble but is Europe’s manufacturing core — is falling rapidly, thanks to a plunge in exports.

If you want to know where the global crisis came from, then, think of it this way: we’re looking at the revenge of the glut.

And the saving glut is still out there. In fact, it’s bigger than ever, now that suddenly impoverished consumers have rediscovered the virtues of thrift and the worldwide property boom, which provided an outlet for all those excess savings, has turned into a worldwide bust.

One way to look at the international situation right now is that we’re suffering from a global paradox of thrift: around the world, desired saving exceeds the amount businesses are willing to invest. And the result is a global slump that leaves everyone worse off.

So that’s how we got into this mess. And we’re still looking for the way out.

Anonymous said...

Dienstag, 03.03.2009
Ukrainischer Rechnungshof geht von bis zu 18%-tigem Rückgang des BIP in diesem Jahr aus

Der Rechnungshof der Ukraine prognostiziert eine Verringerung des Bruttoinlandsproduktes (BIP) des Landes im Jahr 2009 um 15-18%.

Wie UNIAN berichtet, erklärte dies heute der Vorsitzende des Rechnungshofes der Ukraine, Walentin Simonenko, auf einer Pressekonferenz.

Seinen Worten nach, geht man beim Rechungshof davon aus, dass die dem Budget zugrunde liegenden Prognosewerte für die Makrowerte der Ökonomie in 2009 nicht real sind.

“Ich verstehe nicht, wie man ein Wachstum des BIP um 0,4% annehmen kann, wo wir einen Rückgang um 15-18% haben werden”, sagte Simonenko.

Er betonte ebenfalls, dass das Inflationsniveau in 2009 wesentlich höher liegen wird, als es die Regierung prognostiziert.

Der Staatshaushalt geht von einem Anstieg des BIP um 0,4% auf ein nominales BIP-Niveau von 1,062 Billionen Hrywnja (ca. 101 Mrd. €), einer Inflation von 9,5%, und einem Anstieg der Herstellerpreise von 12% aus.

Der Anstieg des realen BIPs der Ukraine im Jahr 2008 betrug im Vergleich zum Jahr 2007 2,1%, dabei stieg das BIP in 2007 im Vergleich zum Jahr 2006 noch um 7,6%.

Quelle: UNIAN

A German translation of: http://www.unian.net/rus/news/news-303860.html

Simonenko, Member of the Ukrainian financial court, states that the GDP could decrease by 15-18% in 2009.

This is so far the worst forecast I have heard. Well, one has to be cautious as there could be some political motives behind this forecast. Additionally, I am not informed about the role of this instiution.

But even a 10% drop (while IMF and others are somewhere around 5%), would have sever consequences for the Ukrainian economy.

In which range do you see it, Edward?


Anonymous said...

The rating is worthless. Since October Ukraine has been unable to get any commercial loans. Where will it end CCCC--? Does anybody still care?
What would be the difference if the country would default? Nothing if you ask me. The default is already factured in by anybody dealing with Ukraine. What if their mostly foreign owned commercial banks would default? Should they care? They could let them go broke and refund the local currency deposits. Then retstart the banks and have the outstanding loans repaid in local currency. A reprieve for their shrinking middle class. For Ukraine it would actually be beneficial. There is not that much in deposits and it is in national currency but the foreign owned loans need to be repaid in foreign currency and mean an effective future capital outflow of nearly 100 Billion if the banks survice. They should not do anything to save the foreign owned banks. For Austria (Raffeisen), Italy (Unicredit) or France (Paribas) it would be a disaster.
As such with the exception of the national government budget they are in a confortable position. They just have to secure the IMF loan for that one.
Above all it shows to me the vunerability of the EU orginal countries. We bail them out or we have our Lehmann brothers when our trust in our own banks is already severely weakened.

Anonymous said...

Hryvnia Soars as Ukraine Revises Budget to Meet IMF Loan Terms
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By Emma O’Brien

March 4 (Bloomberg) -- Ukraine’s hryvnia climbed the most in more than two months against the dollar as the government announced budget changes to comply with the terms for a second payment of an International Monetary Fund loan.

The currency jumped 6.5 percent to 7.8500 per dollar by 3:56 p.m. in Kiev, the biggest gain since Dec. 29 and the highest level in three weeks. It climbed as much as 7 percent to 9.8094 per euro, the strongest advance since Jan. 15 and the highest level versus the common currency in a month.

Ukraine turned to the IMF for a $16.4 billion bailout last year to avert a default and stabilize its banking system. The former Soviet republic got the first $4.5 billion payment in November before approving a budget deficit of 5 percent of gross domestic product that put the second tranche of $1.9 billion in jeopardy. The IMF had demanded a balanced budget.

“The progress being made between the prime minister and the president has done a lot to soothe people’s minds when it comes to the second tranche of the IMF loan,” said Ozgur Yasar Guyuldar, an emerging-markets strategist in Vienna at Raiffeisen Centrobank. “They’re seeing some positive news flow for once.”

President Viktor Yushchenko announced the budget review on March 2 after a meeting with Prime Minister Yulia Timoshenko, the central bank chief and leader of the opposition last week. The IMF, set to return to the former Soviet republic in the next few weeks to discuss further payments, has praised efforts by the leaders to bury political differences and draft a recovery plan.

Ukraine is facing a 5 percent economic contraction after nine years of expansion and is struggling to finance a $12.3 billion current-account deficit, according to government data.

Job Losses

Unemployment rose to 3.2 percent in January and industrial production tumbled 34.1 percent, the sharpest drop since the country regained independence in 1991. The PFTS stock index has dropped 33 percent this year, as steelmakers including Yenakievsky Metalurhiyny Zavod cut production.

The economic crisis has been aggravated by power struggles between Timoshenko and Yushchenko, hampering efforts to revive growth and cut budget spending.

The two leaders of 2004’s Orange Revolution that overthrew a pro-Russian government have clashed over economic policy and relations with Russia and ended their parliamentary alliance in September last year.

The renewed cooperation is “very encouraging,” said Ceyla Pazarbasioglu, chief of the IMF’s mission to Kiev. The IMF would accept a budget deficit of 1 percent of GDP or it “may be wider,” should Ukraine be able to find “non-inflationary ways of covering the deficit,” she said Feb. 27.

The hryvnia has slumped 40 percent versus the dollar over the past six months, making it the worst-performing currency tracked by Bloomberg after the Seychelles rupee. The Natsionalnyi Bank Ukrainy has sold foreign currency to prop up the hryvnia on a “daily basis,” Serhiy Kruhlik, head of the bank’s external relations, said in an interview from Kiev.

Currency Auction

The central bank plans to hold a currency auction targeted at households today, Kruhlik added, similar to an auction Feb. 27 that sold $34.5 million to commercial lenders.

Policy makers’ interventions in the currency have been contributing to a reduction in liquidity, which is also supporting the Ukrainian currency, said Dmitry Gourov, a Ukraine economist in Vienna at UniCredit SpA.

“They’ve been keeping interest rates high and pulling hryvnia out of the market through their currency interventions,” he said. “This is forcing people to convert foreign currency.”

Ukraine’s overnight refinancing rate was increased by two percentage points to 18 percent last month and the rate for non- collateral loans was raised to 20 percent, from 17 percent, in a bid to help steady the hryvnia, the central bank said Feb. 18.

The extra yield investors demand to buy Ukrainian bonds instead of U.S. Treasuries fell 22 basis points to 35.24 percentage points, according to JPMorgan Chase& Co.’s EMBI+ Indexes. Still, the so-called spread has risen almost 10-fold in the past year.

While the economy is likely to contract 7.5 percent this year, Ukraine “will not” default on its sovereign debt because the IMF and European Union wouldn’t want to risk the possibility of contagion to eastern Europe, Ivan Tchakarov, an economist in London at Nomura Holdings Inc., wrote in a research note today.

To contact the reporter on this story: Emma O’Brien in Moscow at eobrien6@bloomberg.net

Anonymous said...

Ukraine's economy may rebound "relatively quickly" next year after a sharp contraction in 2009, helped by exports, according to Frank Gill, Standard & Poor's primary credit analyst.

Ukraine's economy may expand 4.5% in 2010, compared with the 12% contraction expected this year, he said in a phone interview with the Bloomberg news agency from London.

"We see the potential for a relatively quick rebound next year, Gill said, adding that "the outlook remains highly uncertain, as it hinges on external demand for metals, as well as metals prices."

"Ukraine is facing shocks that would damage any economy. Prices for chemicals and steel have declined sharply, while import prices are being pushed higher by rising natural gas tariffs and the exchange rate depreciation. At the same time, the ongoing political uncertainty is very unhelpful," the analyst said.

S&P cut Ukraine's credit rating to CCC+, seven levels below investment grade and the lowest grade in Europe, on February 25, saying political turmoil poses risks to crediting. S&P left the outlook negative, indicating a possible further cut. Ukraine has been forced to turn to the International Monetary Fund help to avoid a default, stabilize the banking system, and aid its currency. The Washington-based lender approved a $16.4 billion loan and gave an emergency handout of $4.5 billion in November. The government's plans to run a state budget deficit of 5% of gross domestic product have jeopardized the second installment, which was expected on February 15.

"It is not clear how strong the commitment of the Ukrainian authorities is to implement the IMF program. Government debt is quite low, though rising significantly, but the willingness to pay the debt is not clear ahead of the presidential elections," Gill said.

S&P expects the hryvnia's rate to weaken further, Gill said. Ukraine's national currency has lost more than 40 percent against the dollar in the last six months.

"The hryvnia depreciation will further drive the deterioration of the banks' asset quality, and that is ultimately going to raise sovereign debt levels, as the government will need to recapitalize local banks," he said.

Further "exchange rate depreciation raises the risk of bank and corporate defaults and rescheduling," said Gill. Still, "in the long-term perspective, it will help the economy to be more competitive as balance sheets are freed up again," he said.

S&P expects Ukraine's current-account deficit to shrink to 2% of gross domestic product by the end of 2009, compared with 6.7% last year, said Gill.

Edward Hugh said...

"Ukraine's economy may rebound "relatively quickly" next year after a sharp contraction in 2009, helped by exports, according to Frank Gill, Standard & Poor's primary credit analyst."

I can think of no good reasons for anticipating a V shaped recovery in Ukraine, I'm afraid. Even exporting will be hard if the rest of the global economy doesn't recover robustly, which looks unlikely at this point. And forget about domestic demand.


Anonymous said...

I agree with you, Edward. I also don't see any potential for such a recovery, while in the same time, they stipulate a -12% decline for this year. Well, one could argue that then a rebound has to be relativley higher from a lower absolute value.

But even if steel prices rise due to increased exports to China (if this happens at all), Ukraine has another problem, which currently all Eastern European Economies face, though not in the same extent: Outflowing capital.

And that next year a recovery could happen concerning capital inflows, is highly uncertain if you look at the current problems of the world economy. The housing market in the USA is still declining and as we all know, housing bubbles are persistent.

Edward Hugh said...

Hi again,

"while in the same time, they stipulate a -12% decline for this year. Well, one could argue that then a rebound has to be relativley higher from a lower absolute value."

Yep. Of course. If they are right about a 12% contraction this year the contraction may well be smaller next year, but that would hardly count in my book as a "recovery". I would like to see some sort of positive growth before we start talking about that. Even 1%.

Also, be careful about China, there is massive over-capacity in China, and China really needs to be exporting steel. They will either have to have substantial internal deflation or devaluation (politically difficult) IMHO.

Anonymous said...

Real-Estate (Kyiv-Post):

Discounts by vendors during the signing of real deals on the secondary real estate market in Kyiv in February 2009 reached 37% of the price on average.

According to a press release of Kyiv-based Planeta Obolon real estate agency, the figure was calculated on the basis of an analysis of real deals signed in February with the direct participation of the agency, and on the basis of deals that the agency had checked and had full information.

"According to our statistics, in February apartments were sold around 37% cheaper than the average supply prices in each market segment," reads the document.

The average price of one square meter on the secondary real estate market in Kyiv in February 2009 fell by 9.7%, to $1,968 per square meter, reaching the fall 2006 level.

"In February the value index was lower than $2,000 per square meter. This is the level of September-October 2006. The pace of the fall is so fast that the majority of potential buyers are only considering purchases, and waiting for further falls in prices," reads the release.

The Planeta Obolon agency said that recently some potential buyers had started indicating larger sums in their applications for the acquisition of apartments than was registered in January or early February 2009.

In addition, the number of apartments for exchange on the secondary real estate market in Kyiv is growing.

"People are trying to find ways to settle their housing and financial problems with the help of exchanges. The number of exchange offers is small, but it is growing. This gives grounds to say that during the crisis, the forgotten methods of apartment exchange would see a revival," reads the document.

The press release says that in February work at some construction sites resumed.

"The stirring up [of work] is mainly linked with attempts of constructors to receive funds from the cabinet for financing of uncompleted constructions," reads the release.

According to the release, referring to data from Kyiv-based Prostobank Consulting, interest rates on mortgage credits denominated in hryvnias on the primary real estate market in February fell by 3 percentage notches on average compared to January, to 19.97%. Mortgage credits denominated in foreign currency were not issued.

"It’s possible to receive mortgage credits to buy apartments on the primary market, but only in those houses for which certain banks issue credits. The banks are interested in the completion of construction, [and have] started crediting constructors and investors in certain houses," reads the release.

According to the forecast of Planeta Obolon, there will be no radial changes in the trends registered in February. However, it is possible that the number of deals will grow.

Anonymous said...

More homeowners can’t keep up with mortgage payments during economic crisis.

Vitaliy Chernyavskiy and his wife, Olena Tkacheva, moved to Kyiv from Zaporizhya four years ago to start a family in the city with big opportunities. Years of rapid economic growth convinced the family last year to buy the apartment they had been renting.

It looked like a safe bet then. The family was making $5,000 a month, comfortably middle class, and more than enough to cover the $1,800 mortgage payment.

Then everything went downhill fast.

When Ukraine’s economy took a dive, Chernyavskiy lost his job last year and his wife’s income barely covered the monthly payments. Last August, the bank raised the interest rate, bringing payments to $2,100 on the home loan. Combined with a 40 percent drop in the hryvnia since then, the married couple is now drowning in debt. Their salaries are paid in hryvnia, while their loan is repaid in dollars.

Today, they are one missed payment away from having their lender start foreclosure proceedings that could force them to surrender their home to the bank.

Sadly, they are not the only ones in Ukraine. Dreams are crashing all around as people slip from middle class to poverty. “Sometimes there are just two days left before the salary payment, and you have an empty fridge, so you can not afford to have children in these circumstances,” Vitaliy Chernyavskiy said.

The Chernyavskiys are among 10 million Ukrainians who took out loans in the last two years, with at least half of those credits denominated in dollars. Dollar loans came with lower interest rates. Currently there are 400,000 families owing mortgages of Hr 102 billion (or about $13 billion), “80 percent of which are in foreign currency and, under the current hryvnia rate, 20 — 30 percent [of borrowers] cannot meet their loan obligations,” said Andriy Nesteruk, analyst at Phoenix Capital.

Officially, some 2 percent of loans were classified as non-performing by February, but others believe the figure is much higher. As these unpaid debts pile up, banks are facing threats to their own solvency. “From the beginning, we should understand that the crisis creates difficulties both for clients and banks,” Greg Krasnov, the general director at Platinum Bank, said. When clients can't pay their loans and lose their homes, banks face bankruptcy.

Oleksandr Koksharov, partner at Best Credit Anti-Collection, notes that – as real estate prices drop by double-digit percentage points – buyers are finding themselves “under water.” In other words, they owe more than the home is now worth.

Also called being “upside-down,” the unhappy circumstance gives borrowers a powerful incentive to default on their debt obligations and walk away from their loans. “It would not make sense for people to continue repaying the loan whose value significantly exceeds the market value of the collateral,” Koksharov said.

The Chernyavskiys know well the temptation to default. Vitaliy has gotten a freelance job that brings in some income, but not enough: “The situation is very frustrating because I spend the larger part of my salary to pay off the mortgage. I can’t use money that I earn. Meanwhile, my debt is only growing, so I don’t see the point [of keeping up with payments].”

On the other hand, if the bank seizes their apartment and sells it via auction, the proceeds are likely to cover only half of the loan amount at current depressed prices, leaving the family on the hook for the remainder.

The bank is not much help in finding a way out, the Chernyavskiys said. Mortgage restructuring specialists offered the family an extension of the repayment period, from 15 to 25 years. That, however, would increase the cost of the apartment to $500,000, while decreasing monthly payments by just $100. The couple owes $2,500 in fines for late payments. They are currently paying what they can, but can’t keep up.

Despite this situation, banking experts say borrowers should promptly inform their lenders about financial problems in order to work out a plan to save their homes. Banks would rather have money, not apartments, cars and other items that they would most likely sell at a loss. Experts also advise borrowers to learn their rights instead of just accepting what banks say.

“As soon as they encounter financial problems, they need to notify their bank in order to find a mutual solution,” advised Platinum Bank’s Krasnov. “Both a client and a bank should work together to work out the best affordable solution.”

Recently, the Justice Ministry announced that banks have the right to seize people’s homes without a court decision if borrowers miss payments for more than 90 days. A few days later, Justice Minister Mykola Onischuk explained that the new law applies only to mortgages issued after Jan. 14, and then only if this condition was specified in the mortgage contract.

Meanwhile, pressure is mounting on the government and National Bank of Ukraine, specifically, to develop programs to help families like Vitaliy Chernyavskiy and Olena Tkacheva. The central bank has started selling foreign currency to select banks at the below-the-market rate of Hr 7.8/$1 so that their mortgage clients could take advantage of lower installment payments. On Feb. 27, the NBU sold the first portion of $34.5 million to 12 banks.

Petro Poroshenko, deputy head of the NBU, suggested that the loan burden should be divided equally among the borrowers, banks and government. Appearing on the “Shuster Live” TV show, Poroshenko said that “33 percent must be paid by the borrower, and the government should provide incentive for the borrowers to do so. The next third should be borne by the lender by means of decreasing the interest rate, and the remainder of the loan should be paid by the government.” Poroshenko said ministries should step in.

But with government and banks in tough financial shape, little help may be forthcoming to borrowers, many of whom may end up defaulting on their obligations and losing their homes.

Anonymous said...

Quite optimistic:


Macroeconomic Forecast Ukraine
Downs-and-ups of Ukrainian economy

Forecast period: years 2009 and 2010

Date of forecast completion: January 23, 2009

Authors: Oleksandra Betliy, Alla Kobylyanskaya, Vitaliy Kravchuk, Dmytro Naumenko, Katernyna Pilkevitch, Roman Voznyak

Lector: Veronika Movchan

GDP: The real GDP is estimated to decline by 7.2% in 2009 with major sectors of economy reducing their production due to deteriorated domestic and external demand. At the same time, thanks to the global economy recovery the real GDP is forecasted to growth by 6.4% in 2010.

Fiscal indicators: The consolidated fiscal revenues are expected to decline to 27.9% of GDP in 2009. The Government will have to run consolidated fiscal deficit at 1.7% of GDP to finance high recurrent fiscal spending. The consolidated fiscal revenues are forecasted to decline further to 24.3% of GDO in 2010, while the deficit will increase to 2.4% of GDP.

Balance of payment: In 2009 Ukraine is expected to have both current account and financial account deficits (4.8% of GDP and 8.2% of GDP, respectively), which will be covered by the interventions of the NBU. In 2010 the current account balance as well as financial account balance is forecasted to turn positive.

Monetary survey and inflation: The money supply is expected to remain close to 2008 levels in 2009, while it will grow by 24.2% next year. The exchange rate will be on average at 8.8 UAH/USD in 2009 and 7.28 UAH/USD in 2010. The consumer price inflation is estimated to slow down to 17.5% on average in 2009 with further deceleration to 14.1% in 2010.

The Major risk of the forecast: If the global economy will not start its recovery in the fourth quarter of 2009, the forecast will be downgraded.

Anonymous said...

Experts have forecast a 12% decrease in Ukraine's GDP in 2009 and 18% inflation, Ihor Burakovsky, the director and board chairman of the Institute for Economic Research and Policy Consulting, said at a press conference on Monday.

"Today we can say that actually 2009 will be a very complicated year, first of all, for Ukrainian producers," he said.

He said the expert forecast is pessimistic enough.

"We say that obviously the fall of GDP could be 12%, and inflation will remain at a high level, a level of 18%," the expert said.

According to Burakovsky, this follows tendencies observed in the world, but on the other hand inflation in Ukraine remains one of the largest problems in the economy.

In addition, Burakovsky forecasts the Ukrainian budget will be significantly reviewed.

According to Burakovsky, Ukrainian politicians today face many challenges: to review the budget, estimate the revenues to the national budget, and to decrease and restructure budget expenses.

Burakovsky said the authorities were failing in their efforts to save jobs.

"It is obvious that the government also needs to change its policy on the labor market, and to act to expand mechanisms or seek [new] formats to help people who have lost their jobs," the expert said.

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