CRISIS PURGATORY: Still on the Agenda
If only Ukraine could extract enough oil and gas, well just oil or just gas, neither IMF press releases expressing concern over NBU “irregularities” concerning currency reserves, nor the American cold shoulder shown Ukrainian dignitaries would have marred this joyous event. After all, the Moor had done his duty, as almost 100% of the bondholders responded to the Cabinet’s request and agreed to restructure them.
In fact, this restructuring will go down in both Ukrainian and world history.
NON-DEFAULT
The reader ought to remember that the procedures were unprecedented, in that the Ukrainian Cabinet’s investors numbered thousands of legal entities and natural persons across the world. Notifying them, let alone talking them into the deal, seemed at first totally impractical. Foreign consultants and partners deserve every praise for getting across to practically every potential investor in the sovereign default; they had solved a super problem, reducing the current debt service cost to a minimum.
Elated with its success, the Ukrainian Finance Ministry decided to forge ahead. Now they are determined to prolong the bond exchange term until August 7, 2000, so no holders are too late. The official statement of the ministry and ING Barings (as the exchange lead manager) reads that the prolongation decision was made in view of the fact that certain private investors would need more time to prepare the required documents and apply for exchange. “The Ministry of Finance calls on all investors in the existing public commercial debt that have not as yet submitted their applications to use this last opportunity to participate in the stated exchange, since no payments will be made under bonds that are not restructured past the exchange deadline,” stresses the documents.
In other words, what we have is non-default. Yet that somehow does not make everyone overjoyed.
CONFIDENCE IS DEARER THAN MONEY
When taking office, Viktor Yushchenko said that for Ukraine the problem was not excessive debt but rather short-term liabilities. For this reason he hoped that by prolonging their term the financial system would get out of the time trouble of foreign payments and would proceed to serve the real sector. The latter, in turn, would raise Ukrainian living standards. Could the newly appointed Premier have expected at the time that this most complicated problem would be supplanted by an even more complex one before anything could be done about the first? And that other problem proved not only more complicated, but also one shattering all cheerful expectations and making all attempts to get the domestic economic back to normal totally senseless. The quick-witted reader must have guessed that the latter problem came from Ukraine’s number one creditor, the International Monetary Fund, precisely its refusal to provide credit there and then, due to its profound distrust of the Ukrainian leadership. Preliminary estimates show that the IMF has at least thrice given Ukraine credits proceeding from deliberately distorted (in the words of Viktor Suslov, head of the Verkhovna Rada interim committee of inquiry) information. Actually, the current refusal is just an excuse (rather than the reason), because there is abundant evidence that the IMF previously turned a blind eye to such “deliberately distorted information.”
However, before discussing possible reasons (apart from distrust) why the IMF has refused to support the most reform oriented Ukrainian Cabinet, suppose we recall precisely what mission the IMF is threatening to dodge. Under joint IMF-Cabinet projects for 2000-2001, Ukraine would finally register economic growth. IMF credits would neutralize the public debt burden (including liabilities toward IMF) and the Ukrainian leadership would take actions allowing enterprises to work efficiently. In other words, Ukrainian growth as a whole would again depend on the IMF. This year alone Ukraine has to pay one billion dollars (allowing for the restructuring of debts, which payment would be more or less bearable only with IMF help). Unless we get money from the West we will once again face the familiar consequences (which, incidentally, have not become any less inevitable just because Ukraine could dodge them at the very last moment): currency devaluation, bankruptcy, and poverty.
Thus Ukraine no longer has a short-term credit problem, but neither does it have one of confidence. The latter appears much harder to sustain. Apparently, the Cabinet is frightened even to ponder the possibility of IMF actually turning down that credit. Meaning that those in power will have willy-nilly to keep their nose to the wind of change at IMF.
ECONOMIC GROWTH IMPEDED BY CORRUPTION
To begin with, the wind of changes did not start blowing at IMF yesterday, not even the day before. After the Asian (or world — the experts are not yet certain) crisis, the International Monetary Fund has been exposed to constant criticism, being accused of following Keynesian ideas and feeding its borrowers illusions to the effect that the state can achieve lasting economic results by manipulating the monetary supply and interest rates to mitigate actual investment risks. Many are of the opinion that the state or any given international economic business or financial institution meddling into information originating from any given market and corrupting it is bound to make inadequate decisions, and that investors are thus bound to make similar decisions. The result is a growing mass of ineffective investments with all the attendant negative consequences. Milton Friedman, one of today’s economic geniuses, said in no uncertain words that IMF policy has become a destabilizing factor on developing countries’ markets — and not because of the requirements imposed on its customers, but primarily because the Fund tries to insure private investors against their own mistakes. After this statement some economists called for closing the IMF and friction started between IMF and World Bank top-level executives that cost some of them early retirement.
Mounting criticism from political figures and people representing various political and economic trends made it clear that criticism alone would not do. Realistic proposals were required. Naturally, they were made. President Clinton, addressing a top-level IMF-World Bank meeting on October 6, 1998, said it was necessary to modernize and reform the international financial system to prepare it for the twenty-first century. Proceeding from the idea of foreseeing and avoiding, Mr. Clinton proposed to give the IMF an opportunity to help countries in need even before they start experiencing serious economic hardship or confront big financial problems. To do so, the US President believes, an international reserve system should be set up like the US Federal Reserve System that would forestall such negative phenomena on the financial market and, consequently, in the economy as a whole. Actually, Mr. Clinton’s initiative boils down to providing the IMF with additional allocations, considering that those available apparently far from suffice. Indeed, the IMF received an amount it lacked from the United States but no radical changes have yet been registered there, although there are plenty of scenarios.
France proposed modifying IMF operations by transforming its Board of Governors into a mechanism being in constant operation, working out its policy and making high level decisions, but the proposal was rejected, because it did not broach the problem of finance sources to expand IMF credit projects. Europe’s Left (now practically in power in most countries) proposed to substantially enhance IMF authority, even by establishing a “world economic government” within its framework to counteract worldwide crises. Many proposals were submitted, concerning changes in world business management, ranging from a special tax levied on large currency exchange operations as an additional source to replenish the IMF budget to setting up an international insurance- and-credit partnership to supervise the flow of capital. Options were offered by almost every member country and by groups of states, from G-7 to the specially established Group-22 to what was termed the 15 leading markets in the making.
No radical proposals have been accepted yet, although a work group to study all such options was formed. Almost a year and a half later it published a recommendation to the effect that IMF should discard all the practices that had undermined its reputation (e.g., long-term credits for development projects, like those in Ukraine). Most likely, the said document was authored by US experts. Hence it makes sense to assume that the political clauses were also dictated by Congress, namely that the borrowing countries must not be corrupt, and that being free from corruption would be considered evidence of a given country’s dedication to reform.
Last week IMF finally received its new leader, after four months of debate, 57-year-old Horst Keller, the formen EBRD President. Things will happen largely due to his commitment not to swim against the current of “American” reforms.
INCIDENTALLY
The English language media seem to attach too much importance to Ukrainian-IMF relationships, acting IMF Executive Director Bifort Wijnholds told a press conference in Kyiv on M arch 19. One ought not to get excited about this, he suggested and stressed that the Ukrainian government and National Bank of Ukraine had demonstrated their openness when letting NBU currency reserves be inspected by international auditors, reports Interfax Ukraine. Mr. Wijnholds also noted that all accusations are history now.
At the press conference, Finance Minister Ihor Mitiukov said Premier Yushchenko had a meeting with Jorje Marces Ruarte, deputy head of IMF’s second European department on March 18, which lasted “many hours.” Both sides discussed, among other things, resuming EFF financing (the kind of money Ukraine can thus receive would actually cover all Ukraine’s payments to IMF under previous credits). Mr. Mitiukov further said completing the audit of NBU’s 1997-98 currency reserve transactions and publishing the findings remain an important condition for solving this problem effectively. In addition, he added, “Ukraine must get prepared as best it can for the IMF mission expected to arrive at the beginning of April.” Of the fifty preliminary measures recommended by its mission in February almost thirty are ready to be implemented, he stated.
Mr. Mitiukov also announced that Ukraine could address the Paris Club with a proposal to restructure its debt shortly after financing from international financial institutions had resumed. Gerrit Zalm, Finance Minister of the Netherlands, also spoke at the news conference, saying Ukraine stood a fair chance of restructuring its debt to the Paris Club: “If reasonable proposals are made, I see no reason why this shouldn’t happen,” said the Dutch Minister.
As of the start of 2000, Ukraine’s public debt totaled $12.5 billion, including about $5,3 billion due international financial institutions and some $950 million payable to the Paris Club.
