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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

Excessive Normalization

23 March, 1999 - 00:00

Ministry of Finance claims there is no danger of collapse of the so-called
debt pyramid. Really?...

By Iryna KLYMENKO, The Day
Minister of Finance Ihor Mitiukov's announcement at a Cabinet of Ministers
meeting that his ministry had managed to normalize the situation with Ukraine's
domestic public debt may really inspire respect for the professionalism
of state experts. Is it simple, under conditions of acute shortage of both
time and resources, to be able to negotiate the deferment of debt payment
with those who also need money?

But let us see if the state apparatus's merits are all that great. Mr.
Mitiukov explains: "The year 1998 and early 1999 became a turning point
in public debt management. The situation with the public, and above all
domestic, debt has been normalized. After an additional conversion of debentures
this month, we can be absolutely sure we have canceled any danger of the
collapse of the so-called debt pyramid on the domestic market." So "normalization"
has been achieved, first, owing to the good will of those who hold governmental
debt securities. Could the banks have held out? Probably not. One-on-one
talks were held with each bank, and as soon as it was possible to find
at least the slightest "liquidity," a "political" decision was made to
convert the bonds. (We deliberately say "political" decision, for a pragmatic
decision would have meant refusal.) As a result, domestic debt payments
have dwindled by Hr 700 million this year. It still remains a secret how
many domestic government bonds will be repaid in favor of less healthy
banks. Nor is it clear how the healthy banks will bear the "normalization."

The other side of the "normalization" (naturally, in the Finance Ministry's
interpretation) lies in the "prospective" reduction of government guarantees
and domestic loan interest rates. "The short-term task in public debt management
is to slow, as much as possible, the debt increment and to reduce the amount
of government guarantees. With this in view, the Ministry of Finance has
modeled various forecasts on debt management until 2010. The goal is to
bring public debt payments to not more than 6% of GDP, increase the term
of debt obligations, and cut interest rates to 20%," the Minister of Finance
concluded.

Mr. Mitiukov obviously wants to do his utmost to report on his own successes
as soon as three or six months later. But he will be helpless with other
ministries and agencies which are obliged, by force of their mere existence,
to fulfill quite different tasks. And the Ministry of Finance undertakes
to fulfill these tasks tomorrow itself. It may be recalled that a few weeks
ago the Ministry failed to sell any government bonds at any price even
to the National Bank. This means it is senseless to speak about interest
rate cuts. Then, at approximately the same time, the National Bank paternally
advised banks to issue loans to coal miners (with the latter suffering
net losses of at least Hr 2-3 billion). Then, last week the Cabinet of
Ministers promised electric power people to give guarantees for an about
Hr 300-million "wage-related" loan (with the latter also running "losses").
What does it all mean? Only one thing: after stopping one debt gap, the
Ministry of Finance is ready to make three new gaps. And this does not
keep Mr. Mitiukov from asserting that since August 1998 "the Ministry of
Finance has stopped utilizing bank resources for large-scale borrowing,
thus creating good conditions for the reduction of bank loan interest rates."
This may be so. But not because the Ministry of Finance did not want it.

THE DAY'S REFERENCE

Ukraine is supposed to repay a Hr 17.5-billion debt (principle and interest)
by the end of 1999. Foreign debts account for $2 billion (Hr 8.7 billion)
of this amount. In 1998 total budgetary revenues (the only source of repaying
public debts) were Hr 11.4 billion, only 9.8 billion of them having been
paid in money. The government's capabilities of debt repayment are limited:
borrowing on the domestic market is practically impossible due to non-repayment
of treasury-bond debts. In 1998 the National Bank bought out 71% of treasury
bonds due to the fact that there was no demand for them. The probability
of receiving foreign loans is now very low. What is left is cooperation
with international financial organizations.

 

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