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ECONOMY FOR THE WEEK
Last week a new crisis upsurge in Brasilia led to replacement in the leadership
of the local Central Bank office. Francisco Lopes, a floating rate adherent,
had to go. Remarkably, quite recently he had headed the Brazilian office
of the Quantum Fund owned by famed currency speculator and philanthropist
George Soros. In other words, he was among those plotting attacks on the
Brazilian real. Skeptics joked that Michel Camdessus and George Soros had
taken power in that country, the former promising help on behalf of the
IMF. Nothing of the kind happened in Ukraine for the simple reason that
the IMF is still nominally in power here, nominally because the Fund has
never had any real power. To preserve this situation for yet another indefinite
period, a Ukrainian official delegation spent the last entire week in Washington.
Viktor Yushchenko flew to the United States on January 31, later joined
by Premier Valery Pustovoitenko, Finance Minister Ihor Mytiukov, and Economy
Minister Vasyl Rohovy. The Premier returned after a two-day visit, bringing
what was described as firm confidence that the EFF cooperation will continue.
True, to have this confidence he had to resolve "problem questions" on
the spot, meaning problems with three US companies doing business in Ukraine.
As for EFF prospects, this question will be answered a bit later, probably
after testing the liberalization of the foreign exchange market. Fair enough,
because IMF mission members will learn more from people's reaction than
from any official reports.
But let us get back to the key factor which sent the Ukrainian delegation
overseas to once again try to explain, apologize, and make new promises
just to return and start going back on their word one more time. Why don't
they just toss away all those foreign recipes the way they did two years
ago? Apart from the hard cash presented on a silver platter, their recommendations
have been of no use whatever to this government or President.
Apparently they can't, all things considered. And not because of reform
which, in the Premier's own words, is really necessary in Ukraine. What
makes our top bureaucrats fly to America is precisely their inability to
cope with reform and a desire to somehow survive until better times. And
of course, Ukraine's debts which they will never repay given today's political
situation.
The heaviest arrears are on IMF and World Bank loans, even though given
at the lowest interest rates but which, in keeping with world practice,
cannot remain unpaid; only several hopelessly backward African states are
in default with the IMF. These debts are followed by European loans, and
eurobonds, which are not defaulted or written off on the world market.
Their turnover terms stipulate immediate maturation and impounding of any
public property in case of delay in current payments. Thus, writing them
off is out of the question and Ukraine is so far not even considering doing
so, guaranteeing strict observance of all debt commitments regardless of
the domestic situation and arrangements with the IMF.
Actually, this financial punctiliousness of the Ukrainian leadership
is quite superficial so far. Last week the Cabinet decided on unconditional
restructuring of payments on the domestic government bonds owned by Ukrainian
banks and maturing February 2-28 (in other words, the government admitted
to a technical default). The National Bank was instructed to carry out
the exchange. It may really happen due to Viktor Yushchenko's absence.
The reader should be reminded that the previous semblance of voluntarism
characterizing the previous exchange was maintained solely due to the NBU's
insistence when the Finance Ministry was talked into settling the matter
with the bankers amicably. In any case, if exchange is written on the wall
at the NBU, it will come to pass. In a word, the government purse is empty
and the coal miners have to be bought off every month.
Naturally, this unconditional approach will have most unpleasant consequences
for the central authorities. Even now bankers say that this Cabinet decision
will cause the banks to lose all confidence in domestic government bonds,
a confidence already visibly dampened by last year's restructuring. Foreign
experience indicates the same thing.
In particular, the Latin American experience during the crisis at the
turn of the 1990s convincingly shows that such a tactic practically reduces
to zero a country's ability to borrow on international financial markets
and has a most negative effect on its prospects. In addition, a more flexible
strategy may bring greater success in medium- and long-term perspective.
These inferences were obtained by way of assessing the interrelationships
between the type of strategy chosen - confrontation or cooperation - and
its economic effects in Latin American countries. Mr. Klein, a noted international
economist, carried out a most systematized analysis in 1994, studying the
dependence of a country's economic development index on its debt payment
strategy. His ratings reflect variables (e.g., inflation rate, per capita
income increment) and debt strategy parameters in the seven largest Latin
American states.
In his ratings Mr. Klein distinguishes between states in accordance
with the degree of "cooperation" in terms of debt payments - i.e., debt
strategy ratings. Colombia, rated the highest, adhered to the least possible
confrontation with investors, showing the greatest flexibility in negotiating
with creditors, eventually discarding foreign debt deferment. In contrast,
Peru, rated the lowest, took an irreconcilable foreign debt stand. Chile
is placed second, having adopted a mutually acceptable conversion program.
Mexico, placed third, froze no debts or interest, whereas Venezuela, placed
fourth, resorted to such measures but only briefly. The next two countries,
Argentina and Brazil, went through a long term freeze on debt payments.
There is a direct connection between the economic growth rate and debt
payment strategy (confrontation or cooperation). Endless talk and refusing
political concessions to creditors (while declaring "continued cooperation")
seems the most advantageous policy for Ukraine and its upper bureaucratic
echelons must be well aware of it.
Until recently money was borrowed without giving much thought to how
it will be repaid. Now everyone tells the government that it is time to
think about paying it back and try to solve the problem jointly with creditors,
because this solution will determine the country's destiny for decades
to come. As for the creditors, they are prepared to agree that their money
can be returned only by a country put back on its feet, with a strong economy,
where no 1989 Romanian or 1933 German scenario could be played out. And
that to revive and further develop this economy new heavy loans and investment
will be in order. Thus, restructuring needs to be negotiated on a solid
contractual foundation. This, in turn, calls for a program sufficiently
convincing to creditors, secured by all branches of state power. Is such
a thing possible in Ukraine?
Most points of such an "ambitious" program were included in that adopted
by the Cabinet, but seemingly only due to pressure from IMF. However, this
does not mean that the program will be carried out. Most likely, something
altogether different will be done. There is no denying the fact that the
Cabinet is as susceptible to lobbying as Parliament. Judge for yourself:
on February 2 the Cabinet adopted a draft Program of Economic Restructuring
in Ukraine for the Medium Term Period of 1999-2003. This is supposed to
be the first real stage in implementing the Ukraine 2010 Program, Deputy
Economy Minister Anatoly Vrublevsky declared, presenting the document at
a Cabinet session. But then everything went like in the good old days:
industry's share in the gross added value is to increase from 33.5% in
1997 to 33.9% in 2003; that of the agrarian sector is register 12.2% in
2003; machine-building and metalworking are to be regarded as priority
industries (annual average gross output increment to reach 5.3%; that of
construction materials, 4.2%, with 3.4% average industrial output increment),
and so on and so forth.
Can this retread program be used to earn money for the state or its
creditors? Obviously not for the state, because it would take an altogether
different program. Can this program be used to pose as a decent negotiation
position? Of course it can. And this is precisely what they are doing.
By Iryna KLYMENKO, The Day






