Ukraine’s debt: don’t write it off just yet
So, how would you go about bailing out a war-zone? The IMF’s rescue plan for Ukraine, agreed by the fund’s executive board last week, has to grapple with an extraordinary combination of problems. On top of the usual party pack of issues endured by IMF borrowers – a collapsing currency, a large debt burden, a corrupt and sclerotic economy – Ukraine faces the unusual challenge of a belligerent nuclear-armed neighbour fomenting a civil war.
In this context, the critical question of whether to restructure private sector debt becomes an unusual one. The IMF made obvious mistakes in previous crisis countries such as Argentina and Greece, where debt restructurings were delayed until the situation had gone critical. This experience suggests a rapid early reduction in net present value, including a cut in face value if necessary, to tip debt dynamics towards stability. But where there is a large and completely uncontrollable risk that might instantly change the situation, there is a strong case for giving Ukraine medium-term breathing space rather than a once-and-for-all write-off.
Whatever the IMF says, few people genuinely believe that this rescue programme will be enough. Natalie Jaresko, the finance minister, even said as much after the deal was announced. The IMF’s bail-out, which will provide $17.5bn over four years to fill part of an estimated $40bn financing gap, is focused on boosting short-term confidence rather than funding medium-term growth and adjustment. Although the loan comes under the IMF’s medium-term “extended fund facility”, $10bn of its $17.5bn will be disbursed in the first year, and much will go into central bank reserves rather than balance of payments support. As Jaresko correctly says, it is a loan aimed at financial stability rather than growth.
Expecting Ukraine rapidly to grow out of its debt burden is extremely optimistic. Its public debt-GDP ratio, estimated at 73 per cent last year, is likely to go up to 94 per cent in 2015. Ukraine has a weak economy distorted by a corrupt and difficult business environment and by Naftogaz, the loss-making state-owned gas monopoly that hands out expensive energy subsidies to households. Liberalising and improving it will take time and, as ever with structural change, is unlikely to be good for growth in the interim. Kiev has already promised to raise household energy prices to reduce Naftogaz’s deficit. But since those increases are only partly offset by targeted social welfare payments, the rise in fuel prices will take money directly out of household budgets and hence domestic demand.
Clearly the debt burden will have to be reduced. Of the $40bn financing gap, the IMF programme envisages $15.3bn being provided by debt restructuring. The debt-GDP ratio is supposed to be down to 71 per cent by 2020.
But the size of the debt problem itself depends critically upon variables entirely outside the IMF’s or the Ukrainian government’s control, namely the security situation and the actions of Russia. Ukraine actually managed to hit its general government budget deficit target with some ease last year, but weakening growth, clearly driven by the security situation, drove up the debt-GDP ratio. This year’s collapse in the hryvnia has already worsened the situation by inflating the local-currency value of foreign debt and prompting massive rises in interest rates. A resolution of the conflict in east Ukraine would most likely spark a rapid rebound in growth and the exchange rate, and make the debt problem much smaller.
In other words, any debt writedown negotiated now might easily prove to be too much, or nothing like enough. The “debt sustainability analysis” (DSA) that the IMF issued as part of its support of the program gives the usual probability distributions showing how likely the debt projections are to be met. But in reality the distribution is most likely bipolar: either Russia withdraws its aggression, in which case the debt projections are plausible, or it doesn’t, in which case they are not.
Delaying a reduction in face value could also help to finesse the tricky question of what to do with the $3bn that Ukraine owes the Russian government, a loan taken out by the now defunct pro-Moscow administration in Kiev. In theory, Ukraine defaulting to Russia would prevent it receiving IMF funds, as the Fund’s rules prevent it providing financing to a country in arrears to sovereign creditors without a wider international debt relief agreement. But the IMF lending to Ukraine to help it pay Russia in full while wiping out private creditors is likely to cause the odd eyebrow to be raised in the US Congress and other IMF-sceptic creditor environments. Avoiding an explicit writedown in privately-held debt might keep this issue quiet.
Although the IMF has lent in conflict-affected countries many times, in Africa and elsewhere, rarely can it have assembled such a big rescue loan for a large economy in the centre of a major geopolitical stand-off. With the gigantic uncertainties involved, it would be an absolute miracle if it managed to get the financing gap filled, the banking system secured, the exchange rate stabilised and the economy growing again with a single lending programme now.
Gabriel Sterne at Oxford Economics, one of the most trenchant critics of the IMF’s failure to press for an early writedown of debt in Greece, argues that the best route for Ukraine now is a three-year moratorium on all principal and interest payments. By the end of that, the Fund should have a much better idea of how much money Ukraine has to pay its bondholders.
He is right. Ukraine is not a Greece or an Argentina. For the moment, the country needs breathing space while the security situation has time to become clearer. A freeze on payments to private creditors makes sense. A final deal on debt stock can wait.
Keine Kommentare:
Kommentar veröffentlichen