bne IntelliNews -
The EU will provide €1.8bn in macroeconomic assistance to default-threatened Ukraine, the European Commission announced on January 8. But the move might not be enough to save Ukraine from a sovereign default.
The loan comes one day after a call by veteran financier George Soros for the EU to find €50bn for Ukraine, and a plea by Ukraine's prime minister, Arseny Yatsenyuk, to German TV viewers for funds to help "Ukraine defend Europe."
The move is the EU's first direct acknowledgement that Ukraine is facing financial collapse, with the funds intended to help "with the critical challenges the country is facing, such as a weak balance of payments and fiscal situation," according to a statement by the Commission.
"Ukraine is not alone... The European Union has provided unprecedented financial support and today's proposal proves that we are ready to continue providing that support," European Commission President Jean-Claude Juncker said.
But the new funds fall far short not only of the €50bn demanded by Soros, but even of the €15bn extra funding that many believe Ukraine needs to stave off default. "The country is estimated to require around $15 billion of additional financial assistance in 2015, on top of the funds envisaged in the already approved $27 billion financial aid package [from the International Monetary Fund]," analysts at private equity outfit SigmaBleyzer wrote in a report on December 8. "If this financing is not secured, the country risks facing a full-scale financial crisis."
The decision to provide the extra funds to Ukraine has to be approved unanimously by EU member states, which could slow the process given the current political uncertainty in Greece. The funds are also conditional on the IMF's resumption of its funding for Ukraine, which is in turn conditional on Ukraine adopting stiff reforms, such as eliminating energy subsidies.
According to SigmaBleyzer, the ongoing devaluation pressure on Ukraine's hryvnia has nixed previous attempts to eliminate energy subsidies by hiking domestic tariffs on gas supplied to the population and utilities, since Ukraine pays for its gas imports in hard currency.
The government announced another gas price hike on January 5, but devaluation now means that to fully eliminate energy subsidies, the government would have to hike the price paid by households fourfold in 2015. "So far, the government has not officially announced such move, which is likely to be extremely unpopular," says SigmaBleyzer, predicting that around half of Ukrainian households would then qualify for financial assistance from the budget to pay utility bills.
The IMF is also likely to demand changes to Ukraine's budget, which was passed at 5:00am on December 29 in an emergency sitting, with MPs reporting that they had not been provided with a copy of the law. Full details of the law only emerged when it was published in the government announcer on December 31. "[G]iven that the budget has significant risks, negotiations may not be easy," says SigmaBleyzer.
But the EU funding decision, in combination with decisions by international lenders on smaller investments in Ukrainian infrastructure in late December and January, including $0.5bn in loan guarantees provided by Germany on January 8, does at least show the West is still backing Ukraine, providing an important signal to the markets, which rallied on the EU announcement. "With a billion or two from the US, and maybe $6-7bn more from the IMF, the hope is that something close to $10-15bn can be delivered to beef up the existing $17bn IMF program," writes Standard Bank analyst Tim Ash.
According to SigmaBleyzer, Ukraine now needs fast disbursal of around $5bn in IMF funding, to provide an airbag in the event of a Russian demand for early repayment of a Ukraine's $3bn two-year Eurobond that the Kremlin bought in December 2013. "If these assumptions do not materialize, Ukraine may face a severe financial crisis in 2015," it warns.
Russia has said that it would not demand early repayment of the bond in the likely case that Ukraine's sovereign debt exceeds 60% of GDP, breaching the terms of the loan and possibly triggering a cross-default on other Ukrainian debt. But no one takes the Kremlin at its word after the events of 2014. "Unless Russia can be persuaded to take a back seat over Ukraine, any amount of Western financing will simply not work," Ash concludes gloomily.
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