SUCCESS PREDICTED TO BE SHORT-LIVED

Indeed, the Ukrainian government bonds’ debut on the European market was spectacular, surpassing domestic bureaucrats’ most optimistic expectations. On February 11, Merrill Lynch (US) and Commerzbank (FRG), the lead managers of the Ukrainian Eurobonds, announced the end of preliminary subscription for the foreign 3-year Eurobonds. The bonds proved in great demand even at the consumer study stage, causing the borrower’s appetite to grow from the starting DM 300 million to 500 to 750 million, and demand remained high even after extending supply, as Eurobonds’ quotation on the secondary market noticeably increased while yields dropped from 16% to 14%.

Considering that the Cabinet’s hryvnia obligations are no longer popular with foreign investors preferring to quit the Ukrainian market once their old internal bonds are redeemed, the tempestuous demand for Eurobonds looks more than strange. Well, the strangest of things are explained, sooner or later.

«It’s a temporary upsurge, often typical of such placements. The yields are really attractive,» an official from a large European bank told the Ukrainian News Agency. «Besides, many banks complain that the bonds’ supply is limited, with underwriters selling them to investors who do not put them up for the next bid.» Merrill Lynch’s comments, carried by foreign periodicals, confirm this observation. A very carefully balanced management of obligations reduced speculative involvement to a minimum. The bonds’ other parameters, yield and timing, also proved quite effective. «Investors took the issue with enthusiasm. All they needed was a look at a 16% coupon, and off they were racing to the market,» the head of the developing markets department of a large US bank declared.

Of late, repeated government bond issues have been announced by Russia, Colombia, Croatia, and Lithuania. In Ukraine, the announcement of the issue and sale were separated by more than six months, but this time the bonds’ belated debut proved all the more successful. Chaos on international markets, following the economic crisis in Asia, somewhat dampened the portfolio investors’ activity, with the rate of purchase of high risk debts dropping accordingly. Now everything points to the investors’ refreshed courage, and this was what allowed Ukraine to start the hunting season on the «income-thirsty European retail market.» Here the tactic adopted by Merrill Lynch and Commerzbank turned out faultlessly timed and placed. Unfortunately, that of the government was an altogether different story.

Neither the Ukrainian bonds’ success, nor the attendant price jump could convince skeptics doubting Ukraine’s «borrower’s optimism» before the issue that they were wrong. Often those actually buying bonds made remarks utterly discrediting the borrower’s solvency. «This was a successful operation, but I must confess that Ukraine’s solvency remains very low,» an investment manager said. Independent economists interviewed by foreign media made even sharper statements. To quote just a few: «They’re trying to borrow for the whole year in 1998 and they have no intention of paying back,» a Western lender stated. He went on to say that out of 10 months Ukraine can make purchases during nine months and then go bankrupt. Another Western economist was equally direct: «They are in a financial crisis, because they have to pay more than they have today.»

By and large, Western media agree that, in order to prevent an all-embracing financial crisis, Ukraine should start reforms rather than borrow on international markets. As though following their advice, the cabinet came up with a resolution last week, called On the Stimulation With Investment Activities. The document lists government measures of very impressive scope and the tone is remarkably resolute. Among other things, it mentions the draft Presidential decree, On Measures to Develop Mortgage Loans, draft resolution On Changes in and Amendments to the Provisions on Official Registration of Foreign Investments in Terms of Registration Fees, the undisguised desire to accede to the 1996 Washington Convention on resolving investment issues between governments and foreign entities, and to sign an agreement with the Multilateral Agency for Investment Guarantees, stipulating legal protection of guaranteed foreign investments and use of the national currency. However, these are just projects, and they are not being proposed for the first time. In any other country this move would serve to strengthen the national currency and raise local enterprises’ stock price average. Not so in Ukraine, for people have long stopped trusting such documents. Not only because tons of paper have been wasted on them. More often than not, extremely civilized legal rules fail when put to the test by the existing economic system; they end up changed beyond recognition...

So far, government (and not only government) creditors take a keen interest not in plans of how to start living better as of the first day of such-and-such month but in the mounting indices of the actual internal debt, daily hryvnia devaluation rates, and the government bonds’ frightening yield. Of lesser importance to them is information on talks with IMF. An informed source at the Presidential Administration says the cabinet is already having problems getting the next stand-by tranche. Concern over the increasing budget deficit has, in turn, prompted Ukraine’s international donors, among them the Commission for Europe and World Bank, to caution against financing this deficit using short-term external credits.

Still, the authorities do not seem worried by all these problems — at least not so much as to refrain from borrowing on the eve of elections. And even if foreign diplomats are fully aware that «they are only concerned about how to make it through the next several months,» people in Ukraine see all this only too clearly. It would be naive to expect that NBU President Yushchenko’s statement about his political neutrality was interpreted other than as declared support of the current administration and its fiscal policy. Only a month ago the NBU considered that the population of a country in which wages and pensions are not paid, debts are not returned to banks, and numerous commercial contracts are simply ignored should only hope for currency stability without inflation. It is anyone’s guess why the National Bank does not want to support the hryvnia: because of the new loans that must be sold at as much profit as possible, or because such is the price of political neutrality.