MBS Blog

Oct. 29 (Bloomberg) — The International Monetary Fund said it may conclude negotiations with Ukraine next week to allow the next installment of the country’s bailout loan.

“I hope the talks will be finalized by the end of next week,” Max Alier, the Washington-based lender’s local representative, said in an interview in Kiev today. If the talks are completed, “Ukraine may get the fourth tranche” of its $16.4 billion loan “sometime in November.”

Ukraine is relying on the loan, approved in November 2008, to avoid a default after the global recession and credit crisis undermined demand for exports such as steel and hammered its banking industry. The IMF program was suspended for three months this year because of government disputes over state spending. The IMF said in July that reducing the budget deficit would be key to releasing the next tranche.

The former Soviet state has so far received $10.6 billion of the credit, 4.6 billion of which was used to help cover Ukraine’s state budget gap, Alier said at a round table discussion with trade unions in Kiev today. The state budget gap may reach between 13 percent and 14 percent of gross domestic product this year, he said.

Changes

Over the weekend, the Washington-based lender said the government needs to endorse several policy decisions, including a veto of the wage and pension law approved by lawmakers, before it gets the fourth chunk of the bailout loan.

Ukraine’s parliament approved the law on Oct. 20, increasing social payments, including the minimum wage, in an effort to win voter support ahead of Jan. 17 general elections.

The economy contracted an annual 17.8 percent in the second quarter, after shrinking 20.3 percent in the three months through March.

The loan program is at “serious risk” of veering off track, Fitch Ratings said on Oct. 14, warning that “policy discipline has eroded.”

Fitch has Ukraine’s long-term foreign and local currency issue default ratings at B, five notches below investment grade, with a negative outlook.

(from www.bloomberg.com)

Yulia Tymoshenko’s government has tripled Ukraine’s state debt, and the prospect of default is more probable, according to the former governor of the National Bank of Ukraine and one of the potential candidates for the post of the Ukrainian president, Sergiy Tigipko.

He was commenting on data on the pace of growth of Ukraine’s state debt posted on the official Web site of the Ukrainian president. The debt exceeded UAH 205 billion, and this is three times up compared to late 2007. Despite the fact that the law on the national budget for 2009 allowed issue state guarantees for foreign debts of economic entities worth UAH 37 billion, state guarantees worth UAH 50 billion have been issued, the press service of the politician has reported.

Control over borrowing has been lost.

“Control over borrowing has been lost. This means that loans are taken without understanding how, who and using what funds the debts will be returned. The fact that the president cannot influence the process and criticized the government at his Web site indicates a deep crisis in the power system,” Tigipko said.

“In a couple of years, a half of the national budget will go to the servicing of state loans. Resources needed for social payments will be used for this purpose, as there is no other money. Of course, money printing will be launched at a full capacity,” the politician said.

“It’s obvious that the main thing for government leadership is to maintain semblance of prosperity until the presidential election, and after that everything else can go to hell,” he said.

(from the kyivpost.com)

Ukraine’s Bailout Loan Depends on Policy, IMF Says By Daryna Krasnolutska

Oct. 26 (Bloomberg) — Ukraine’s government must endorse a package of policy steps and veto a wage and pension law approved by lawmakers before it gets the fourth chunk of a $16.4 billion bailout loan, the International Monetary Fund said.

The eastern European nation was due to receive $3.4 billion after a mission from the Washington-based fund arrived in Kiev on Oct. 12 to review implementation of economic reforms.

The IMF is demanding an “agreed policy package, including assurances that the wage and pension law approved by Ukraine’s parliament, which is at odds with the objectives of the authorities’ program, will be vetoed,” the fund said in an e- mailed statement yesterday.

Ukraine is relying on the loan, approved in November, to stay afloat after the global recession and credit crisis undermined demand for exports such as steel and hammered its banking industry. The IMF program was suspended for three months this year because of government disputes over state spending.

“Ukraine is interested in getting the IMF money as soon as possible as part of it is likely to be used to cover the state budget gap,” said Olena Bilan, an analyst at Kiev-based investment bank Dragon Capital. “I think it may take between two to three weeks for Ukraine to solve the issue.”

Failure to Comply

The loan program was renewed in May after Prime Minister Yulia Timoshenkopledged to narrow the state budget deficit. The country has received $10.6 billion in loan payments to date.

Ukraine’s 7.65 percent bond maturing in 2013 fell to 90.230 as of 10:15 a.m. in Kiev from 90.437 on Oct. 23 and its yield rose to 10.990 from 10.912, data compiled by Bloomberg show.

Ukraine has failed to comply with the loan’s terms, including raising natural gas prices for households and adopting laws needed to stabilize the financial system. At the same time, Ukraine’s parliament approved a law on Oct. 20 increasing social payments, including the minimum wage, in an effort to win voter support ahead of Jan. 17 general elections.

The IMF said in July that reducing the budget deficit would be key to releasing the next tranche. The government will run a budget gap equivalent to 8.6 percent of gross domestic product this year, the IMF estimates. That figure excludes the cost of rebuilding the financial industry.

“The mission found that the economic and financial situation in Ukraine is stabilizing as a result of policies under this program,” the IMF said yesterday. “Preserving these gains will require policy discipline and corrective actions in some areas.”

Wage, Pension Law

Timoshenko said on Oct. 21 she would ask President Viktor Yushchenko to veto the wage law adopted by the parliament as it “undermines the budget and fuels inflation.”

Yushchenko’s economic aide Roman Zhukovskyi declined to comment when asked whether the president will veto the law when called on his mobile phone today.

The economy contracted an annual 17.8 percent in the second quarter, after shrinking 20.3 percent in the three months through March.

Yushchenko and Timoshenko have clashed over fiscal policy. The president has criticized the government running a “huge” budget gap, while the opposition has blocked the passage of legislation through parliament until its demands for higher social spending are met.

Biden Reaffirms U.S. Commitment to Central, Eastern Europe

By Irina Savu

Oct. 22 (Bloomberg) — U.S. Vice President Joe Biden, in a one-day visit to Bucharest, reaffirmed America’s ties to central and eastern Europe 20 years after communism fell and said his country is working to strengthen relations with Russia.

“Some have said the new system was meant to appease Russia. Nothing could be farther from the truth,” Biden said in a speech on regional security today at the University of Bucharest’s Central Library. “The missile defense is not about Russia, our approach is driven by security.”

Biden is touring the region this week in a move aimed at reassuring members of the North Atlantic Treaty Organization of the U.S. commitment to defense. President Barack Obama last month reversed a decision by his predecessor,George W. Bush, to station interceptors and a radar system in Poland and the Czech Republic to counter the threat of missiles launched by Iran. Romania wasn’t involved in the plan.

“The United States remains committed to our alliance with Europe, which is the cornerstone of our foreign policy,” Biden said. “Our European partners have grown broader and stronger. We cannot succeed without you and, pardon my presumption, you cannot succeed without us.”

Obama plans to use a new system composed of SM-3 1A missiles aimed at reducing the threat from short- and medium- range missiles from states including Iran.

Polish Support

Biden secured Poland’s commitment yesterday to assist with the proposed system, after central Europe leaders said they were concerned about Russia’s intentions in the region, which was dominated by the Soviet Union for more than four decades after World War II.

“We are working to strengthen our relation with Russia. We believe it will benefit us all,” Biden said. “We’re not naive; we share common interests with Russia: stabilizing Afghanistan, preventing Iran from getting” nuclear weapons.

Biden also said eastern European countries can guide Georgia, Moldova and Ukraine “along the path to stability and prosperity,” and there is much work to be done in Armenia, Azerbaijan and Belarus. Biden said the Obama administration also “stands against a 19th-Century notion of spheres of influence.”

After meetings with the leaders of the major Romanian parties that are posting candidates for presidential elections on Nov. 22, Biden will fly to the Czech Republic.

Afghanistan Mission

Romania, a NATO member since 2004, has been a close ally to the U.S. in Afghanistan and Iraq and hosts a military base near the Black Sea city of Constanta. The European Union member has 1,045 soldiers stationed in Afghanistan, according to the Romanian Defense Ministry’s Web site.

“I really appreciate your government’s embrace of the new missile defense architecture,” Biden said after a meeting with Romanian President Traian Basescu. “It’s a much better architecture, it has the benefit of protecting you physically, as well as the United States.”

(www.bloomberg.com)

EASTERN EUROPE: Out of the Danger Zone?

Fears of a full-fledged regional financial crisis across Eastern Europe have eased, calmed by a strong IMF presence, hefty external assistance to those in need, and a general improvement in global risk appetite. Nevertheless, the region is not out of the woods. The specter of a Latvian devaluation still looms, banking stress continues, and rising political risk in several countries with IMF programs is a concern.

The Good: Bright Spots Have Emerged

Risks may linger, but bright spots have emerged. The second quarter upturns (q/q) inFrance and Germany—key export markets and important sources of foreign capital for Central and Eastern Europe—are a positive sign, but the jury is still out on the strength of the recovery. Meanwhile, the improvement in global risk appetite cannot be underestimated. As the saying goes, “A rising tide lifts all boats.” For now, investor appetite for Eastern European sovereign debt has picked up compared to earlier this year, which has alleviated external financing risks.

The Improved: Contagion Effects from a Latvian Devaluation Likely To Be Limited

While devaluation is not imminent in Latvia, the risk that it will happen next year remains high. The potential for contagion into other CEE economies, however, is more limited now than it was this summer. Temporary ripples throughout the region’s currency and stock markets are likely in the event of devaluation, but the effects, for the most part, should not be lasting. Investors have had time to digest the risk and policymakers have had time to prepare. A recent IMF paper by Prakash Kannan and Fritzi Köhler-Geib shows that the degree of anticipation of a crisis is an important determinant of whether contagion occurs.

The risk of spillover effects is also limited by the fact that CEE economies have increasingly differentiated themselves from each other. Poland, for example, stands out as the only EU economy to have averted recession. Central European economies, like the Czech Republic and Poland, are widely seen as fundamentally healthy and should largely be insulated from long-term ill effects.

Nevertheless, RGE continues to believe that a Latvian devaluation could shake confidence in other currency pegs in the region. That means Estonia, Lithuania and Bulgaria, which all have fixed exchange rates to the euro, could experience the most severe aftershocks if Latvia abandons its peg.

The Bad: Banking Stresses Remain

Eastern European banking systems have come under stress as the number of non-performing loans (NPLs) on their balance sheets has spiked amid sharp economic contractions. The peak is not expected until early 2010, as NPLs typically lag the business cycle by several months. Deutsche Bank forecasts NPLs will jump to 5-10% of total loans in the CEE-3 (Czech Republic, Hungary, Poland), 15-25% in the Baltics, 15-20% in South East Europe and 30-45% in Ukraine.

Foreign-owned (primarily Western European) parent banks operate in the region via subsidiaries and account for 60% to 90% of total bank assets in most CEE countries, and the fear has been that rising NPLs could test these parent banks’ commitment to the region.

RGE expects parent banks to stay the course, but the possibility of a complete pullout (while highly unlikely) cannot be completely discarded. A week ago, Swedbank—a top Swedish bank and Latvia’s largest lender—raised the threat of withdrawing from Latvia if lawmakers there pushed through a controversial mortgage bill. “If this runs through we need to reconsider our operations in Latvia,” said Thomas Backteman, vice president of corporate communications for Swedbank, according to Reuters.

In recent months, foreign parent banks in some of the worst-hit economies—Hungary, Romania, Serbia—have collectively pledged to support their subsidiaries as needed, making a pullout highly unlikely. The bigger concern is further tightening of lending, which will cut into the region’s growth prospects and delay recovery.

The Ugly: Political Uncertainty Threatens IMF Programs

There is no doubt that IMF programs in some of the region’s most vulnerable economies—Bosnia, Hungary, Latvia, Romania, Serbia, Ukraine—have played an important role in calming fears of a regional financial crisis.

Even with IMF programs in place, however, these economies are not immune to crisis. Of particular concern are the difficulties these governments might face in meeting loan conditions as they try to balance electoral ambitions against economic realities. Will they adhere to their IMF programs? If they don’t, will the IMF keep lending anyway? There are no easy answers to these questions. If financing is halted, these countries could again be facing full-blown capital account crises.

Compared to practices during the Asian Crisis, the IMF has shown a newfound flexibility and leniency in dealing with program countries. The Fund dropped its request for land reform in Ukraine and approved wider budget deficit targets than originally agreed in Romania, Hungary, Latvia, Serbia and Ukraine. However, the lender’s flexibility is not boundless.

So far, the spotlight has focused on Latvia’s government, which is struggling to cut spending and keep its currency peg. Latvia’s lack of adherence to loan program targets resulted in a delay in the IMF’s disbursement of a €0.2 billion loan tranche, originally due in March but not paid out until August. Ukraine is another problem country where authorities have failed to meet program targets—with January presidential elections looming, the government has stonewalled on targets of energy reform and raising household gas prices. In November, the IMF will decide whether to disburse a $3.8 billion tranche to Ukraine.

Romania has emerged as the latest hotspot and could put the IMF in a difficult position. The abrupt collapse of the government in October has left a political vacuum and raised fears over the country’s ability to adhere to its €20 billion loan agreement. The conclusion of the second review of the IMF program is scheduled for December and involves a €1.5 billion disbursement. Some analysts expect that payment to be delayed. The concern is that Romania’s uncertain political situation could affect the viability of the entire program.

(from the RGE Monitor)

I wonder what would happen if Ukraine did not get the money it is expecting from the IMF? With pivotal elections coming in just a few months, the funds will probably be released with additional promises made by Ukraine to stem the sort of corruption that allowed funds to vanish when the last payment was made.

The perspective of the IMF must be that reforms will happen rather quickly after the election…and they must fear that without the funds, Ukraine would sink. This would almost certainly bring down a lot of European banks and the subsequent bailout after this type of debacle, would be even more costly to the IMF and the EU.

Ukraine Sees $3.4 Billion IMF Payment in November

By Halia Pavliva and Daryna Krasnolutska

Oct. 17 (Bloomberg) — Ukraine expects the International Monetary Fund to release a $3.4 billion payment under the agency’s $16.4 billion lending program to the country, Economy Minister Bohdan Danylyshyn said.

“This will help sustain the economy and, to a certain extent, help cover the budget deficit,” Danylyshyn said today in an interview at Ukraine’s Consulate in New York. “It’s a pretty complicated situation in Ukraine, that’s why we expect (a) budget deficit this year and next.”

Ukraine is relying on the IMF loan program to stay afloat after the credit crisis undermined demand for its raw materials, including steel exports. The country has received $10.6 billion in loans to date.

The IMF team, led by Ceyla Pazarbasioglu, arrived in Kiev earlier this week to assess whether Ukraine meets the terms of the loans. Ukraine is at “serious risk” of veering off track ahead of the country’s next review in November, Fitch Ratings said in a statement on Oct. 14.

“It would be politically right to support the government’s measures aimed at stabilizing the situation,” Danylyshyn said. “That would also be a very good signal for investors.”

No Higher Tariffs

The government of Prime Minister Yulia Timoshenko “abandoned” commitments made at the second review of the country’s program with the IMF, including a failure to increase prices for natural gas paid by households and utilities, Fitch Ratings said the statement.

“I think, we have succeeded in trying to explain the situation to the IMF: If we hike the tariffs, people would simply stop paying,” Danylyshyn said. “This issue is not on time. We can get back to it as soon as in July 2010.”

Timoshenko said last week there will be no increase in natural gas rates this year.

Lower gas prices add to the country’s budget deficit, estimated this year by the IMF at 8.6 percent of gross domestic product, excluding bank restructuring costs. Fitch forecasts the deficit at 8.5 percent of GDP, or 11.1 percent including the deficit of Nak Naftogaz Ukrainy, a supplier of gas.

The deficit will shrink to about 3.8 percent next year, Danylyshyn said, adding that this year it may fall to 6 percent.

The IMF and Ukraine’s cooperation stalled earlier this year for three months while the government struggled to reach a deficit agreement.

Economic Outlook

Ukraine’s economy, while recovering from the worst global financial crisis in seven decades, may decline as much as 12 percent this year and grow 3.7 percent next year, Danylyshyn said, adding that the average prices for ferrous metals, Ukraine’s major export, may increase 5 to 8 percent next year.

The economy of the former Soviet state contracted at an annual rate of 17.8 percent in the second quarter, after shrinking 20.3 percent in the previous period.

Ukraine’s exports may rise 9.5 percent next year, while imports may be 6 percent higher, he said. The hryvnia is expected to trade between 8.2 and 8.5 to the U.S. dollar, Danylyshyn said.

The annual inflation rate for consumers may reach 12.5 percent in December, compared with earlier expectations of 9.5 percent, Danylyshyn said. Inflation may fall to 9.7 percent by December 2010, he said.

Direct Investment

The country expects to get $20 billion in foreign direct investment between next year and 2012 to help it diversify the economy away from exports of raw materials, such as steel and grains, and modernize existing facilities, Danylyshyn said.

The government plans to bolster exports by increased trade with Middle East, Asia and Africa, he said. Ukraine expects the U.S. will end import taxes on Ukraine’s metals and chemicals by the second quarter of next year, Danylyshyn said.

Ukraine’s trade deficit may narrow to $77 million, compared with $3.76 billion in the first eight months of the year, he said. The country’s trade surplus next year may reach $1.8 billion, he said.

(www.bloomberg.com)

Ukraine Economy to Grow 2.5% in 2010, World Bank Estimates

By Kateryna Choursina

Oct. 15 (Bloomberg) — Ukraine’s economy will grow more than previously estimated next year as the former Soviet state’s export outlook improves, according to the World Bank.

Gross domestic product will expand 2.5 percent in 2010, compared with a previous forecast for 1 percent growth, World Bank economist Ruslan Piontkivskyi said at a press conference in Kiev today. The bank maintained its forecast for a contraction of 15 percent this year.

“The Ukrainian economy will be mainly impacted by an increase in demand for its exports,” Piontkivskyi said, while adding that demand for the country’s sales abroad won’t rebound to levels seen before the global financial crisis.

Ukraine is relying on a $16.4 billion loan from the International Monetary Fund after the credit crisis undermined demand for its exports, mainly steel, and left its financial sector stumbling. The country’s output contracted an annual 17.8 percent in the second quarter, after shrinking 20.3 percent in the first three month of the year.

The hryvnia gained 0.9 percent against the dollar to trade at 8.1200 at 12:36 p.m. local time. Against the euro, the hryvnia was 1 percent higher at 12.1125.

The World Bank sees Ukraine’s inflation averaging as high as 14 percent in 2009 and as high as 11 percent next year, Piontkivskyi told reporters.

The inflation rate will probably be 13.8 percent by the end of this year, according to a statement handed out to reporters after the press conference.

(from www.bloomberg.com)

Ukraine Stocks Are World’s Most Overbought: Technical Analysis

By Michael Patterson

Oct. 13 (Bloomberg) – Ukraine stocks are poised to retreat after a measure of price momentum for the benchmark PFTS Index jumped to the most “overbought” level worldwide, according to Danske Bank A/S.

The PFTS index climbed 5.2 percent yesterday, sending its 14-day relative strength index to 93, the highest level among 70 equity benchmark indexes tracked by Bloomberg. The last time the RSI climbed above 90 was in 2007, when it reached a peak of 98.5 on Feb. 27 of that year. The PFTS tumbled 20 percent in next four trading days for the world’s steepest retreat.

“The rally looks rather overdone,” Lars Rasmussen, a senior emerging-markets analyst at Danske Bank in Copenhagen, wrote in an e-mailed note. “From a macro-economic perspective I find it hard to justify.”

The PFTS has surged 38 percent in the past month, the steepest gain worldwide, as investors bought shares on signs of a recovery in the global economy. Ukraine’s gross domestic product contracted a record 20.3 percent in the first quarter and 17.8 percent in the second, according to government data.

The RSI tracks momentum by comparing daily closing prices over a given period of time. When the gauge climbs above 70, technical analysts say the measure is more likely to retreat.

(from www.bloomberg.com)

Ukraine Fears For Its Future As Moscow Muscles In On Crimea

Emerging-Market Bonds Extend Rally as Recovery Attracts Funds

By David Yong

Oct. 8 (Bloomberg) — Emerging-market bonds rose, extending this year’s advance, as mounting evidence the global economy is recovering from a recession prompted investors to favor higher- yielding assets.

The EMBI+ Composite Index, which tracks total returns on the foreign-currency debt of developing nations, climbed to 493.50 as of 1:06 p.m. in Singapore, set for its highest close since JPMorgan Chase & Co started compiling the benchmark in 1993. It has risen 26 percent this year, set for its best annual gain since 2003. The index fell 9.7 percent in 2008 as the collapse of Lehman Brothers Holdings Inc. froze credit markets.

“There’s still positive momentum in high-yielders as there’s a lot of cash flowing in the global system,” said Rachana Mehta, head of fixed-income at Singapore-based KE Capital Partners, a unit of Mitsubishi UFJ Financial Group Inc. “The market may consolidate gains until the U.S. starts raising interest rates, which may not be anytime soon.”

The Federal Reserve’s benchmark rate is zero to 0.25 percent and policy makers said Sept. 23 they intend to keep it there for “an extended period.” Manufacturing and services output in developing economies expanded in the third quarter at the fastest pace in more than a year, according to an HSBC Holdings Plc purchasing managers’ survey published Oct. 6.

Narrowing Spreads

The extra yield investors demand to own developing nations’ bonds instead of U.S. Treasuries fell four basis points to 3.17 percentage points today, according to JPMorgan Chase & Co. The spread narrowed to a one-year low of 3.13 percentage points on Sept. 16. The risk premium widened to as much as 8.65 percentage points a month after Lehman Brothers Holdings Inc. filed for bankruptcy in September 2008.

The spread on Philippine debt today fell three basis points to 261, Argentina’s declined 21 basis points to 697 and Brazil’s dropped five basis points to 233. Russia’s slid two basis points to 244. A basis point is 0.01 percentage point.

Pakistan debt has rallied 162 percent this year, Ukraine’s jumped 118 percent and Ecuador’s surged 102 percent, the best performances among debt tracked by JPMorgan’s broader EMBI Global Index.

Pakistan plans to raise $500 million by selling bonds in the international market, possibly in the first quarter of 2010, Dawn newspaper reported yesterday, citing unidentified finance ministry officials. The Philippines may sell dollar-denominated bonds by year-end, Finance Secretary Gary Teves said in Istanbul yesterday.

Asian Growth

An upbeat outlook for regional economies may bolster demand for those issues. HSBC, Europe’s biggest bank, on Oct. 6 raised its 2010 economic growth forecast for Asia excluding Japan to 7.6 percent from 6.9 percent. Thai consumers are the most confident in 11 months, according to the findings of a monthly survey published today, and Taiwan yesterday announced the smallest decline in exports since October 2008.

Positive economic data in Asia continue to emerge, supporting expectations for a strong recovery in the region, Diane Vazza, head of global fixed-income research at Standard & Poor’s in New York, said in a statement. Still, global capital flows “could reverse course abruptly” in response to factors independent of the region and cause recent gains in asset values to vanish, she said.

(from www.bloomberg.com)