Ukraine - debt, financing and FRAs.
Now I know I am not very popular - typically for actually saying what I think. TBH - I don’t care, someone has to say things as they are (or I think they are - I might be wrong, indeed am likely to be wrong). But someone needs to kick the tyres and think outside the box.
Reviewing the IMF EFF SLR as below as it relates to the whole DSA story on Ukraine:
It really is a thing of beauty - nice DSA charts which likely spring out of some IMF analysts excel spreadsheet. He/she/they put in some numbers which are plucked from the air in a particular novelist scenario and hey presto out pops an array of pretty charts. They are pretty, but pretty meaningless in my view if the core and even worst case scenarios are not realistic.
The core and worst case scenarios just relate to assumptions as to the duration of the war - ending in 24’ or dragging thru to 25’. Fair do’s - no one knows there and the IMF have as good a chance of guessing the outcome as me. The given (according to the IMF) is that the West will provide $120bn in the base case scenario to fill financing gaps and fill any additional shortfall if needed. Indeed, the Fund assumes another $20bn need in the best case outcome which it dutifully fills from the Western financing money tree, unthinkingly - evidently.
I think this base assumption that the Western tax payer will write whatever cheque that needs writing is fatally flawed and the IMF should scenario plan for such an out-turn. Actually given the problems Biden is having getting the $61bn thru Congress, the high chances of a Trump victory and all Ukraine financing stopping, then divisions in the EU - Orban, Fico, Wilders, Le Pen (?) how can the IMF be so assured that such huge financing figures can be assured for the next decade for Ukraine.
Imagine a scenario where Western financing halves - it’s not unrealistic, it’s even likely. Faced by huge financing gaps, Ukraine reverts to the printing presses, the currency devalues, inflation spirals, the population don’t get paid their wages or pensions, social and political unrest ensues. Putin benefits and Ukraine’s defence is threatened.
Interestingly the IMF is pushing for early debt treatment next year. It’s brain dead IMF stuff pushed on them by the official creditors who are also brain dead. They are all living in la la land where they think Western tax payers are idiots and will let them write big cheques for Ukraine while actually letting the culprit - Russia - off the hook, by doing everything they can to defend frozen Russian assets. This whole programme’s financing is designed to allow Western governments to do the unconscious-able and pay Russia back all the assets frozen in the West. No mention at all in the IMF document about the use of frozen Russian assets. So crime pays - seemingly from an IMF and G7 perspective. You can invade a country, commit grievous war crimes, destroy the economy of a country and the IMF and G7 say: “here’s your money, would you now like us to bend over for you?”. Disgraceful.
Actually dangerous for Ukraine - as above Ukraine’s IMF EFF is based on totally ridiculous and unrealistic financing assurances from the West. Best be honest - the numbers don’t add up, we cannot assure that $120-140bn will be forthcoming so let’s think where else we can get the cash. And the only realistic source of financing is the $300-400bn of frozen Russian assets in Western jurisdictions. And if you don’t want to use them then be serious and realistic about how you are going to cover Ukraine’s huge financing needs.
Notable that lots of investment banks this week have been doing the maths around a DSA, taking the IMF guidelines that they see the debt ratio as sustainable at 65% with a GFN at 8%. With Eurobonds trading with 20-handles you can imagine agreement over a debt treatment which is seen as relatively soft, as offering recoveries in the 50-60s. But how realistic is any of this if the financing assurances as above are not worth the paper they are written on. And surely investors have a moral/ESA obligation here to ask how come Western tax payers and bond holders (pensioners) are bearing all the costs when Russia is being protected and walking away without having to pay any price via its frozen assets in Western jurisdictions. Actually by agreeing any such deal you facilitate day light robbery by Russia - and our governments are enabling this. It is sweeping the issue of reparations and getting Russia to pay for its crimes under the carpet.
The starting point for all this should be: what is the cost of financing Ukraine’s recovery? Yes, it’s huge, and Western taxpayers cannot pay, so how can we fund it? Frozen Russian assets. Frozen Russian assets should be the starting point.
And on the issue of the debt treatment - why rush? Why not wait for more realistic financing assurances, decisions around frozen Russian assets, or more clarity around the outcome of the war. As is, unrealistic financing assurances/scenarios risk damaging multiple stage restructurings. Again I just feel the debt treatment is being forced down Ukraine and the market’s throats to try and add marginal gains in terms of financing assurances because someone high up in G7 treasuries ultimately is vetoing the use of frozen Russian assets. If that is the case these people have zero clue about real politik around what Western taxpayers are willing to do long term on Ukraine. Their approach risks under financing Ukraine, and its failure/defeat.
Btw, how does the fund come up with a 65% debt/GDP and 8% GFN for Ukraine as sustainable when it set ratios of 95% and 13% for Sri Lanka which had a much weaker tax base, while Ukraine had experience from 2015 of sustaining debt post restructuring at much higher levels. Feels like finger in the air stuff - but hey ho, need to get things to fit at all cost.