[Marxism] The next Ukraine shoe to drop

Marv Gandall marvgand2 at gmail.com
Thu Sep 18 06:19:31 MDT 2014

With the Ukrainian economy in freefall and its people already subject to harsh austerity measures, the pro-Western government is waiting until next month’s parliamentary elections are behind it before embarking on a further round of savage cuts to secure another IMF loan. 

According to the Wall Street Journal (below), the government needs more than double the $17 billion promised it by the IMF last April. A limited debt default is also being contemplated in consideration that you can only squeeze living standards so far before provoking a popular revolt. But the brunt of any restructuring will be borne by the IMF and Western governments and their taxpayers rather than private creditors. As the report notes, the April IMF bailout “has bought time for the private sector to make an exit”.

It is the Greek template which is being applied in Ukraine, a far cry from the vision of European integration imagined by the many who massed in Maidan last spring.

*	*	*
Ukrainian Elections May Ease Way Toward Bailout Overhaul
By Ian Talley
Wall Street Journal
September 17 2014

Don’t be surprised if the International Monetary Fund overhauls its Ukraine bailout after national elections in late October, including coordinating a restructuring of the country’s debt.

The new parliament would ostensibly be able to enact another round of politically tough economic policies that would help it get a better grip on state finances. Those efforts would in turn help secure the additional financing the country likely needs, including a potential write-down of the value of its growing debt.

“This program is simply untenable,” says Anders Åslund, a senior fellow at the Peterson Institute for International Economics and a former adviser to the Ukrainian government. “The IMF program goes straight towards default.”

The IMF was recently forced to “recalibrate” the Ukraine bailout in its first review of the emergency loan. Still, the fund officially says the program is roughly on track, is fully financed and debt levels won’t overwhelm the government’s ability to pay off its obligations.

Many analysts disagree.

Whether, like Mr. Åslund, they think the program is too soft, or like former U.S. State Department official Josh Cohen, they think the program is overly harsh, there’s growing agreement the IMF strategy won’t work as currently structured.

The IMF view that Ukraine’s debt is still sustainable “should be viewed with a huge pinch of salt,” said Timothy Ash, head of emerging markets research at Standard Bank in London. He points to “huge revisions” in the country’s debt levels and major uncertainties around Ukraine’s security and economic outlooks.

The civil war with Russia-backed separatists in eastern Ukraine has taken a heavy toll on the economy. With the bulk of manufacturing located in conflict-ridden areas, the crisis has fueled a stronger contraction in growth than the IMF originally forecast. War expenses are mounting, tax revenues have plummeted and a gas price dispute with Ukraine’s main supplier, Russia, continues.

Even under a rosier outlook that many economists say is unrealistic, the IMF says Kiev’s debt is expected to breach its “high risk” threshold next year. According to one of the IMF’s worst-case scenarios, a major shock to Ukraine’s growth outlook and its state finances—such as from a prolonged war and gas-price dispute—could balloon the country’s debt obligations to almost 134% of gross domestic product for years to come. That’s nearly twice the “high risk” level:

Fund officials couldn’t say if such a scenario would overwhelm Kiev’s ability to pay its debts and force it into default. The IMF did say that more financing could be needed if the crisis wasn’t resolved in the coming months, more than double the $17 billion the fund has already promised Ukraine under the emergency bailout.

Mr. Ash said that under this scenario debt restructuring is impossible to avoid: “It is inconceivable that burden sharing would not be part of the ultimate resolution.”

Messrs. Ash, Cohen and Åslund all say a debt restructuring is needed to fix the program now, however.

“It is still remarkable that a debt re-profiling was not already undertaken, helping resolve some of the problems at the source and giving the Maydan administration some breathing space at the outset,” Mr. Ash said.

The Institute of International Finance, an industry group representing the world’s largest private banks and other financial firms, warned as much even before the IMF signed off on the bailout deal.

Mr. Åslund suggests “an amicable restructuring” after the elections in October. The fund should use its 1991 program with Poland as a template: “They wrote off half the debt in return for a very strong stabilization and reform program,” he said.

For now, however, the IMF bailout has bought time for the private sector to make an exit.

“The share of public debt held by non-residents is high, but this is shifting from private to official creditors reducing somewhat the implied risks,” fund staff said in their bailout review.

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