2009

Ukraine’s Default Risks

Ukrainian government was no able to perform the state budget expenditures and its obligations without financial support from the IMF. tally of $11 bn. This money flow stopped from November. As a result, external financing is frozen till the elections end that is until the end of winter.

Also Ukraine has other problems with attracting money. Its sovereign ratings are falling, so independent borrowing is not a solution. Similarly, there are some problems with attracting investments, from both portfolio and direct investors. High risks keep investors away from Ukraine. Moreover, situation worsens with lower domestic investment activity and even start of de facto defaults of large companies.

Facing such difficulties, the government considers several opportunities to get more money, but they can be applied just partly. The most effective way, just sequestering the state budget, looks before the elections absolutely unrealistic.

In fact, any government, regardless the elections outcome, will be able to cover the budget gap in early 2010 thanks to tax manipulations (corporate profit tax in advance, VAT not reimbursement, higher excises), but anyway it will not be enough. Surely, the IMF may resume collaboration with Ukraine after the elections, since amount of money needed is not critical for the IMF, while the Fund will try to evade Ukraine’s default.

Whoever is elected, the new sate power will be obliged to keep on social spending in the first half of 2010 because of other elections (local and possible prescheduled parliamentary), so it will have to find a compromise solution with the IMF.

Although real risks for default will appear in 2012 (debt payments back to the IMF and by bonds), in fact, namely 2010 will be really risky default period, because of political and economic inertia.  Even in the case of external (IMF, etc.) support of the Ukrainian state, there will exist situation of a kind of “semi-default”, with a wave of corporate bankruptcies and defaults by liabilities, including state-owned companies.