Again about the Default


May 23, 2015

Again about the Default

By Crimsonalter

Translated from Russian by J.Hawk

1. For some reason, when discussing the default, many commenters are concentrating on the following question: would it be possible to get back the money Ukraine owes us “right now”. The correct answer is that, no, nobody will get anything quickly, the process of extracting money out of an impoverished state is a long-term affair. Will that help Ukraine avoid the consequences of the default? No, it will not. 

 2. The internet pessimist set is advancing the idea that Ukraine can default, and that no harm will come from it, rather the opposite. That’s an economic theory breakthrough. A default is something to be avoided by import-dependent country, and Ukraine just happens to be one. If Ukraine’s default were to be such a great idea, then one has to wonder why it has not defaulted yet but is instead trying to delay its demise. But that’s fine, complex logical constructions cause allergy among those who must believe that “everything is going badly, Putin betrayed us.”

3. There is also a great deal of discussion of the “but the West will be able to buy all of Ukraine at a discount” idea, which is usually then used to demonstrate how a default would be beneficial to the West. I’d like to ask anyone who believes in that idea the following question: so you mean right now only the pangs of conscience are preventing the sale of everything sellable? Or maybe the civil society? Martians? The national debt? Have you read Yatsenyuk’s privatization program? Are you seriously arguing that Ukraine has such a hard-core civil society that it would be otherwise impossible to push through the sale of state assets at a sharp discount? I had no idea that Yatsenyuk and Poroshenko were such principled statesmen 🙂

4. The following has been written about what can save Ukraine from default:

 But just in case I’ll enumerate it once again:
A: Creditors agree to restructure. Likelihood: low.
Arguments in favor: 
1. State Department pressures the creditors.

Arguments against:
1. Creditors have successfully withstood pressure so far and are not engaged in substantive negotiations with Kiev.

B. The London court suddenly decides that “there is no default” even if Kiev no longer pays on its debts or introduces a moratorium. Likelihood: low.

Arguments in favor:
1. “London is always in favor of Ukraine and against Russia.”

Arguments against:
1. Having screwed over the creditors, London destroys its credibility as a financial center in which elites can enter into deals with one another. Are they going to sacrifice London (and its future including as the European yuan and yuan securities trading center) solely to rescue Kiev from default? That’s extremely unlikely, irrespective of the opinion of people who think Ukraine is the center of the Universe.
2. There is interest in a correct court decision by managers and owners of closed trusts which administer Ukraine’s eurobond emissions. Incidentally, after the reading of the conditions of Ukrainian eurobond issuance, an interesting fact came to light: both the Russian and “Western” issue have the same manager, The Law Debenture Corporation p.l.c.

There’s also the exotic variant:
B. Ukraine declares default, but IMF gives it a pile of money anyway. Likelihood: extremely low.

Arguments in favor:
1. Washington hawks will pressure the IMF.

Arguments against:
1. Washington hawks have been pressuring IMF for two years and still can’t force the fund to provide Ukraine with normal financing.
2. It is Lagarde who came up with the condition “restructurization or no more money”, in other words, it’s the IMF that’s pushing Ukraine toward a default. It might be possible to break Lagarde, but that seems like a non-trivial task since they haven’t done it yet.
3. If IMF gives money to a country in default, it causes a chain reaction: countries in a difficult financial situation, such as Greece, Portugal, Ireland, Spain, Italy, can follow the example: default on their obligations and demand money from the IMF. The Fund is clearly not interested in setting that kind of a precedent. 
4. The creditors will try to freeze or divert any financial aid to Kiev through court proceedings.

What will happen to Ukraine in the event of a default?
1. Hryvnia drops. Sharply.
2. An inflation spike and rapid growth of prices.
3. These two phenomena accelerate the collapse of the economy in general, the impoverishment of the population, growth of unemployment, the disappearance of state functions, etc.

Would that by itself destroy the Kiev regime? Most likely it won’t, but it will definitely create serious additional problems by making it even more difficult to sustain the economy and the military at any level.

My view on the situation in Ukraine remains unchanged:

1. If Europe will finally liberate itself from US influence, the “Ukrainian problem” will be solved by Russia, through LPR/DPR. With the logic being “now it’s allowed!”

2. If Europe ultimately succumbs to full US control, then the “Ukrainian problem” will be solved by Russia, through LPR/DPR. With the logic being “now it’s allowed!”

3. If Kiev initiates combat operations, then the “Ukrainian problem” will be solved by Russia, through LPR/DPR. With the logic being “they asked for it!”, and with the situation being used to tear EU away from the US.

For a more complete treatment, go here:

The default, incidentally, strongly increases the likelihood of the third scenario. Of course, it would be better to reformat the territory without large-scale bloodshed, but chances for that are slim. My recommendation to the inhabitants of Ukraine to save themselves through emigration (anywhere, from Anchorage to Vladivostok, depending on one’s taste) remains unchanged.

I hereby close the default topic until new information arrives.

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