IMF Adrift as Kiev Sinks

IMF claims to see "signs of stabilisation" as Ukraine's economy collapses.  A bit like saying "steady as she goes" as the Titanic sinks

Tue, Jun 2, 2015
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Ukraine's economy
Going down like Ukraine's economy

One of the strangest things those of us who write about the Ukrainian conflict constantly come up against is the cognitive dissonance so many Western officials seem to suffer from whenever the subject of Ukraine comes up.

The worse the situation in Ukraine gets, the more optimistic they have to pretend to be.

It seems this strange malady is now affecting even as notoriously hard-nosed an organisation as the IMF.

By any objective measure Ukraine has so far had a terrible 2015.

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GDP in the first quarter was down 17.6%. Industrial production was down 20%. Inflation is officially running at 35% and is expected to grow. Most people think it is already much higher. Ukraine is again running a trade deficit and though, largely because of Western aid, foreign currency reserves have risen to a very low $9.7 billion from a potentially catastrophic $5.7 billion, this is nowhere near enough to get Ukraine through the coming winter.

Meanwhile Ukraine is threatening to default and its debt negotiations are in deadlock. Ukraine has just rejected an offer from its private Western creditors to reschedule its debt payments because the creditors have refused an actual debt write-off.

The hard line Ukraine’s creditors are taking is not because they are insured against Ukraine’s default through credit default swaps. As the writer Ben Aris correctly says, the amount at risk if Ukraine defaults is almost certainly too big to be fully covered by credit default swaps.

The more likely reason for the hard line Ukraine’s creditors are taking is because they calculate that Ukraine is a big and potentially rich country that can fully pay its debts if it is run properly. They almost certainly know this will not happen under the present government, but they are probably looking to deal with its eventual successor. As big companies, they can afford a temporary hit while they wait, which, the way things are going, they probably calculate won't be for very long.

Meanwhile, as the Ukrainian economy implodes and the debt negotiations remain deadlocked, an IMF team has produced a preposterous report that claims to detect "signs of stabilisation”.

Where the evidence of this “stabilisation” is, it is difficult to see. From media reports it appears to boil down to more promises of more “reform” by the Ukrainian government. There have been any number of such promises since the Maidan coup and up to now they have amounted to nothing.

The cynical reality behind this report is that the IMF is due to disperse $2.5 billion in June out of its loan to Ukraine, and that without a report that puts a positive spin on the “progress” made, it cannot do so.  Since the political imperative to disperse the money remains overriding, if only because without this money what’s left of Ukraine’s economy will probably collapse, a report that puts a positive spin on the “progress” made is what we have.

There is one thing that might prevent the IMF from giving Ukraine the money. That is a formal breakdown of Ukraine’s negotiations with its private creditors. At that point even the IMF will have to face the fact that its latest plan for Ukraine --- which depends on an agreement with the creditors --- has failed. In that case the default will become official and the IMF will be forced to pull the plug.

In the meantime the IMF’s officials (already unhappy by all accounts) will have to go on writing nonsense.

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