- Halligan: Ukraine “Economic Tinderbox” Could Spark “Systemic Meltdown”!
Ukraine, reeling under a political coup, is also racing towards financial collapse — and such a collapse could set off financial meltdown in Russia, other emerging economies in Central Asia and Eastern Europe, and, of course, the West as a whole, as Liam Halligan wrote in a commentary published in the Telegraph Feb. 22. Such a “calamity could not only spark renewed hardship and yet more violence across Ukraine itself. There are growing fears this country could also act as an economic tinderbox, causing a systemic meltdown in neighboring Russia, emerging markets more broadly, and possibly even the West.” If the current collapse continues, Ukraine could face both bankruptcy and sovereign default, Halligan wrote.This is despite Ukraine’s great riches — a world-class agricultural capability, steel and other industry, and a highly educated population with “huge mathematical and scientific acumen.” Due to the effects of the world crisis in Russia and Europe, and the 50% fall in the price of steel because of the (relative) slowdown in China, by 2013, the Ukrainian economy had stopped growing. Ukraine’s total external debt hit an all-time high of $137.722 billion, about 80% of national GDP, according to the National Bank of Ukraine, up from $23,811 billion in 2003. Central government debt is $27,280 billion. Estimates of total short-term external debt range from $40 billion to $60 billion, about a third of national GDP.
At the same time, the hryvnia, the currency — like those of Russia and many other nations in the region — is under heavy pressure, and central bank foreign currency reserves falling fast. The central bank reported that foreign currency reserves fell to $17.805 billion as of Jan. 31, the lowest level since 2006, down from $20.416 billion at the end of December. The fall was due to debt repayments of $1.1 billion, including $650 million to the International Monetary Fund, as well as central bank interventions totaling $1.7 billion on the interbank market to attempt to support the hryvnia, which has lost about 4% in value in 2014.
Wall Street’s Fitch and S&P agencies both added to the pressure at the end of last week by warning of possible default and downgrading Ukrainian debt from B to a pre-default level CCC, lower than Greece.
In December, Russia had agreed to provide $15 billion to buy newly-issued Ukrainian sovereign debt over the next two years, and did buy an initial $3 billion Ukrainian debt in January. However, Russia has halted the $2 billion eurobond purchase for this month, Finance Minister Anton Siluanov said yesterday in Sydney, at the G20 meeting, Itar-Tass reported. Russia will make a decision on disbursing another tranche after Ukraine forms a new government. Siluanov told reporters. “We really discussed acquisition of Ukraine’s 2 billion eurobonds last week. As the political situation has strongly changed, we should realize with what government to cooperate [sic], therefore we plan to wait until a new government is formed and we see its policy. Only then we will make a decision,” he said.