The Pain in Ukraine

Finanza Operativa di Finanza Operativa 30 Giugno 2015 | 13:00

di Walter Snyder, Swiss Financial Consulting

Investors are advised to stay out of Ukraine. Hedge funds that like taking on risk have bought Ukrainian sovereign bonds just like vultures swooping down on carrion. The whole business stinks, but then $2.6 billion of notes due in July 2017 rose to 47.43 this week. If the notes are paid back on the face value of the principal, then that would have been a very good investment. In fact, Russia received $75 million on coupons for $3 billion of debt in December 2014.

The situation, however, is not very promising. There is $19 billion of sovereign debt held by private bondholders.  The Ukrainian government is trying to get some creditors holding about $9 billion and led by Franklin Templeton to agree to a haircut of 40% on the principal with coupon reductions and maturity extensions and threatens a moratorium if no agreement is reached. This is part of an attempt at trying to get the principal down to $15 billion.

There is a $17.5 IMF line of credit bailout fund that Ukraine wants to keep flowing in order to stay afloat. But fate is not kind to Ukraine. The economy in the first quarter of 2015 shrank by 18% compared with last year. The IMF forecast for 2015 is a reduction of  -9% in GDP versus an earlier forecast of only -5.5%. Moody“s forecast  of -7.5% in 2015 and -2% in 2016 seems to tread a middle ground. The US and Germany have pledged money but not very much considering the desperate state of affairs.

The IMF has three goals that it wants Ukraine to reach. The first is to save $15.3 billion over four years, thereby reducing the ratio of debt to less than 71 percent of GDP by 2020 and bringing the budget’s gross financing needs to an average of 10 percent of GDP from 2019 to 2025. The current  debt to GDP ratio is 71%, but that will most likely worsen as fighting drags on in the east.

There is really no hope of saving the situation as the industrial base of the country in the Donbas region has been reduced to a miserable state while corruption is still rampant despite claims that it is being countered, and old animosities have not disappeared. Western Ukrainians hate the Russians because of the millions that died in the 1930s thanks to Stalin. The Russians hate the Ukrainians for having collaborated with the Nazis and still call them fascists. Many sadistic Ukrainians served as guards in concentration camps. The sanctions imposed on Russia because of Ukraine are expensive for the EU but not for the US and have not helped much. Ukraine is in the same class as Greece but for different reasons. Stay away.


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