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Where there is no law, but every man does what is right in his own eyes, there is the least of real liberty
Henry M. Robert
16 February, 1999 - 00:00

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ECONOMY FOR THE WEEK 

IS THERE LIFE AFTER DEFAULT?


A banker who manages to survive this Time of Trouble in Ukraine will reply
in the affirmative. Today, however, most would think twice before answering
this question (just as most would certainly keep their doubts to themselves;
why scare potential depositors?).

On January 30 the Cabinet decided to restructure payments on the domestic
government bonds held by Ukrainian banks maturing in February. These bonds
were exchanged for conversion bonds (meaning that the borrower refused
to pay the creditor on time), maturing May 5, July 28, August 11, and September
8. The said exchange was at costs securing the holder 33% annual interest
(that of the loans unpaid was twice as much). After that the post-default
sequence looked as follows:

February 3, the bonds were blocked by the National Bank and the exchange
procedures were carried out without asking most holding banks' consent.

February 4, Finance Ministry Press Secretary Iryna Bezverkha told the
Ukrainian News Agency that the conversion was caused by excess payments
under internal and external government liabilities in February, amounting
to Hr 800 million.

The next day the Finance Ministry offered proof, timely paying ING Barings
Hr 46.8 million worth of obligations placed last August. Content with this
feat, the ministry circulated a statement to the effect that it does not
consider the February restructuring of domestic bonds for the benefit of
Ukrainian banks anything forceful. That same day, however, the Ukrainian
News Agency carried a leak (information received from an anonymous expert
allegedly close to the Cabinet) warning that the February bond restructuring
might be regarded by other domestic and foreign bond holders as a cross-default.
Appropriate procedures (the source went on) are envisaged by the terms
of placement of Ukrainian eurobonds in 1998, totaling some $2 billion.
Thus, if creditors acknowledge this restructuring as a cross-default each
of the said bond holders may present them to the Finance Ministry for payment.
Simultaneously, the anonymous expert suggested that investors were not
likely to do so, aware that Ukraine has no funds for any such early payments.
According to him, only one Ukrainian bank had a large block of eurobonds,
but that bank was badly damaged by the February restructuring.

After the weekend, NBU Governor Viktor Yushchenko promised to ask the
Finance Minister to convert domestic bonds held by resident banks and maturing
in February. Whether he did so and the result remain to be seen. Maybe
nothing, because the National Bank has found itself in a similar situation.

On February 10, it transpired that the Finance Ministry had stopped
redeeming domestic bonds for the NBU's benefit (nominal total: $8.6 billion),
saying negotiations had started with it. "The National Bank has practically
come to terms with the Finance Ministry about deferring payments under
NBU-held domestic bonds until 2001-04," announced Natalia Hrebenyk, director
of NBU's emission department. The aim is to exchange domestic bonds bought
by NBU from the Finance Ministry before September 9, 1998. "Bonds acquired
later will be redeemed on time," Ms. Hrebenyk declared. Inspired by this
"success" in negotiations, Deputy Minister Andriy Lytvyn was dispatched
to a news conference to make public the Ministry satisfaction with the
conversion results. "We evened out the public debt service schedule, adjusting
it to those of other state budget payments... so that now it can secure
us against any future cataclysms," he declared, adding that in the course
of convention the bonds held by 113 resident banks, worth Hr 173 million,
had been exchanged. However, the Deputy Minister was at a loss when asked
to list the banks that had signed no objection to conversion. All he managed
was to assure those present that the Ministry was willing to negotiate
any pertinent issue with any bank.

The bureaucrat's forgetfulness is easily explained. According to Association
of Ukrainian Banks President Oleksandr Suhoniako, only 8 banks agreed to
change their bonds worth Hr 13.3 million in all, while 80 banks notified
the association of their objections and requested assistance. The association
responded quickly.

Indeed, the NBU is not meant to save sinking banks; it does not have
that much cash. Maybe some, on a case by case basis. On February 8, NBU
Governor Viktor Yushchenko told a press conference that the National Bank
had provided Bank Ukraine with Hr 75 million under a Hr 150 million credit
line opened last year to keep the bank liquid. Mr. Yushchenko did not mention
the credit terms or interest rates. He simply said that the remainder would
be received by Bank Ukraine after negotiations with other creditors. It
is interesting to note that never in the short banking history of independent
Ukraine have large reorganizing loans (as in the case with INKO or Lisbank)
during sharp declines in the financial situation helped anyone.

In other words, the Association of Ukrainian Banks should be supported,
at least encouraged. As it was, starting late last week, bankers launched
an extensive campaign with much media coverage to defend citizens' deposits
on which the Cabinet is so shamelessly encroaching. The campaigners constantly
asserted that restructuring bode no bankruptcy for them personally. Still,
the association is preparing documents to contest the Cabinet's resolution
as unlawful, acting on behalf of 67 objecting banks (e.g., Oshchadbank
[Savings Bank], Azhio, Bank Metallurh, Eksimbank, Bank Zevs, Bank Mriya,
Perkombank, First Ukrainian International Bank, Ukrainian Credit Bank,
Finance and Credit Bank, CS First Boston Ukraine...). "The Cabinet resolution
(on restructuring) was passed without coordinating it with the banks, without
allowing for their respective capacities, liquidity, and solvency. This
resolution is fraught with the danger of panic on the domestic financial
market," reads the association's statement. It also forwarded an appropriate
letter to the Cabinet, NBU, and the Finance Ministry. At present, it is
preparing a message to the President.

Possibly the bankers will succeed in holding back some of "citizens'
savings." And nor was it coincidental that NBU raised compulsory bank reserves
from 15% to 17%, effective February 21. The banks were served notice by
NBU Board Deputy Chairman Volodymyr Stelmakh. NBU emission department director
Natalia Hrebenyk explains this increment by excess bank idle cash. "We
checked bank liquidity, analyzed its development for the near future, its
possible impact on the monetary market, and arrived at the conclusion that
the reserve requirements should be raised," she says.

This solution, apart from excess idle cash, has several other motivations.
First, the two percent increment means Hr 200,000,000 to the National Bank,
which can be bought out by the Finance Ministry in exchange for "papers,"
so as to be redistributed among the creditor banks of the government. Secondly,
one ought to remember that Ukraine promised the IMF to liberalize the exchange
market before March 1. Meaning that restricting the hryvnia's free flight
is a pressing necessity. The NBU has already decided to lift two restrictions
binding on the exchange market: a ban on residents borrowing from abroad
at an interest in excess of the interest rate at which the government receives
such loans, and ban on banks issuing foreign exchange loans to non-exporters.
Before long the liberalization process will extend to the stock exchange
and bidding procedures, as well as "separate sectors" of the exchange market.
Thirdly, starting on February 9, the Cabinet and NBU introduced a new currency
corridor: Hr 3.40-4.60 to the dollar. Commenting on its parameters, Deputy
Premier Serhiy Tyhypko noted, "This is a very strong policy under the circumstances
which may secure the domestic producer a stable long-term exchange rate."
Hence, a couple of overzealous banks going down the drain does not really
matter compared to a strong policy being resumed by sheer chance after
a homemade default (actually, default is when one refuses to pay Western
creditors).

By Iryna KLYMENKO, The Day

 

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