How long until D-Day?


June 13, 2015

How long until D-Day?

By Fritzmorgen

Translated from Russian by J.Hawk

Ukrainian securities have been dropping sharply in expectation of the default. They lost 10% of their value only in recent days. It’s a profitable deal for anyone convinced that Ukraine’s economy has a future–you could buy Kiev’s debts at a huge discount today, and make a killing in 2017:

Ukraine’s Finance Minister Yaresko asked the creditors to write off 40% of Kiev’s debts. Moreover, she also said out loud that the default would have no effect on ordinary Ukrainians:

The signals seem clear enough. Nevertheless, it’s already June 13 and Kiev still has not officially defaulted. How long do we have to wait for D-Day?

Bloomberg analysts compiled a minefield of 11 dangerous dates which Ukraine’s finances will have to overcome in the immediate future. The nearest one is June 15, Monday.

June 15. The first IMF inspection

IMF is demanding that  Kiev convince its creditors to write off some of its debt. If it can’t do that by June 15–which now seems unlikely–IMF may stop its cooperation with Kiev and refuse to transfer the next tranche ($1.7 billion) to Kiev in order to plug its biggest financial holes.

June 20. $75 million to Russia.Russia is not demanding to pay its $3 billion debt incurred during the Yanukovych presidency ahead of schedule. However, Kiev still has to pay interest, just as it will have to pay back the principal in December, when the time to pay it comes up.

Naturally, $75 million is a small sum, even for today’s bankrupt Ukraine. But it can’t be taken for granted the budget will have even that much by June 20. Now every straw can break the swine’s back.

July 27. Ukreksimbank debt comes due

The Export-Import Bank has to return debts worth $750 million. That is a substantial sum, and the bank may well not be able to meet it. Actually, the bank was supposed to pay it already April 27, but the creditors gave it three more months. Therefore it is somewhat likely the bank will have to declare default on July 27.

September 15. Second IMF inspection.

IMF has to decide if Kiev is to receive another $1.7 billion tranche, or whether it’s not worth it.

September 23. Sovereign bond payments

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Here Ukraine has to pay $500 million on eurobonds. Merrill Lynch analysts believe this will be a major test for Ukraine’s finances.

October 13. Sovereign bond payments.

Yet another sizable payment, $600 million.

December 15. Third IMF inspection.

If IMF is still happy with Kiev, it will receive another $1.7 billion.

December 20. Russian bond payments.

Here Kiev has to pay back $3 billion from the Yanukovych era, a loan that was issued shortly before the coup.

If Kiev somehow survives until then, the $3 billion brick is practically guaranteed to send its finances to the bottom–especially if Washington is not able to bend the IMF to its will and the IMF holds back even one of the three tranches.

In conclusion

As you can see, it’s no easy matter for Kiev to avoid default. I don’t share Yaresko’s optimism evident in her belief that the default won’t hurt ordinary Ukrainians.

First of all, Ukraine is heavily dependent on imports–80% of diesel and gasoline comes from abroad. Lots of other necessities are likewise imported.

Secondly, the post-default exchange rate depends on the ratio of currency reserves and the amount of printed  money. But the reserves are now in negative territory:

It means that a default would simply flatten the hryvnia and make a liter of gasoline cost not 20 hryvnia, like today, but an order of magnitude more, at least. Ukrainians will be reduced to putting their cars in garages and fearfully observe the price changes in shops, just like in Russia in 1992 when the ruble depreciated by a factor of 20 in the space of one year.

Still, Yaresko is somewhat correct. If the US manages to beat the IMF into submission, it will sharply increase the likelihood of a global conflict:

But economic problems, even serious ones, are still better than the war the US intends to wage, including on Ukraine’s territory.

J.Hawk’s Comment: That last part I don’t agree with. If you plan to wage a war, you make appropriate preparations which are not in evidence. Besides, what Ukraine owes this year, and next year, and next  year, is just too much even for the IMF to stomach indefinitely. The US is also not about to run to its rescue.

Aside from all that, I suspect Saakashvili’s appointment to Odessa is somehow related to all of these deadlines. Odessa is where the money is. It’s a potential cash cow for the regime, given the attractiveness of the seaport and associated facilities. And Saakashvili is just the guy to put the goods on the market and then bid Ukraine farewell to avoid the anger of the masses. It’s only a question of whether enough money can be raised in this manner to push off the default into the next year.

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