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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

Unfortunately for Cabinet, World Financial Markets Do not Believe in Miracles

26 June, 1999 - 00:00

By Iryna KLYMENKO, The Day
The grace period granted Ukraine by the Anglo-Dutch ING Barings Bank to
negotiate loan restructuring expired on June 23. The government suggested
to ING Barings three times that it substitute three-year eurobonds for
the securities, but the bank has not yet accepted such conditions. On the
morning of June 23 both the Ministry of Finance and the National Bank proved
unable to furnish The Day's correspondent with information on how
the talks are going. Simultaneously, high officials incessantly repeat
that the state is not ducking its obligations.

Under the loan agreement, should the bank and the government not find
a way out of the impasse within ten days after the payment due date, the
bank can file suit in London against Ukraine's Ministry of Finance, with
this country's default on its eurobonds a probable consequence.

However, well before the 10-day period expired, the London stock market
recorded on June 15 heavy selling of Ukraine's eurobonds and increased
interest in Russian obligations. In the course of two tenders, the quotations
for some Russian bonds rose a total 200-250%. This strange behavior of
the exchange has been attributed primarily to the fact that the Bank of
Japan began to buy unredeemed and overdue securities from Japanese commercial
banks. The Bank of Japan has allocated $500 million for this purpose. Ukrainian
1998 eurobonds worth DM 1 billion and euro 500 million is in the investment
portfolios of Japanese banks which, clearing their ledgers of such dubious
assets, might have decided to dump the risky Ukrainian debentures.

It became known on June 18 that Moscow's National Reserve Bank also
plans to clear its portfolio of Ukrainian securities and sell about half
its block of Ukraine's foreign bonds issued in 1995 (Gazprom bonds), deputy
governor Vyacheslav Yutkin told the Ukrayinski Novyny Information Agency.
"We want to sell a part of the portfolio. It is a question of $200-300
million. The point is that international auditors always complain that
we have too high a country risk with respect to Ukraine," he said. In general,
the NRB decision came somewhat late. For it is not the best decision to
sell Ukrainian securities in a down market. However, the bank must have
decided that delay could mean death. Moreover, the Russian bank found a
pretext to show its Russian patriotism, turning a profit in the process.

In June of this year, America's J. P. Morgan & Co. investment bank
called Russia's hard-currency obligations profit-bearing leaders among
the securities of the developing nations. According to the bank's data,
the average monthly profitability of investments in Russian state obligations
was 6.42% this May. This has been the highest profitability index on the
bond market of developing countries for two months in a row. Although Russia
is trying to have its foreign debt written off and allows itself, as Ukraine
does, to "overlook" foreign payments, it punctually services Russian eurobonds.
Moreover, the Russian economy has been working wonders in terms of economic
growth since last September: 2% a month or over 25% a year.

Ukraine, conversely, is bracing for a further slump. On June 22, addressing
a conference on forming the 2000 budget, Economy Minister Vasyl Rohovy
said his ministry expected a 2-2.2% GDP drop in the second quarter and
confirmed an estimated 1% GDP drop in 1999 against 1998. Thus, such a prospect
will force even the most optimistic investor to forfeit the securities
of such an unlucky government.

PS: On June 23 the Ministry of Finance released the information
that the talks would continue for another week until June 30. The new financing
scheme will be discussed in the presence of International Monetary Fund
experts. It will be recalled that it is the IMF, which recommended the
government negotiate a "voluntary" restructuring of the loan and linked
such a deal to its next EFF loan installment. Thus it makes sense for the
IMF to participate in bringing together the interests of the conflicting
parties

The new restructuring scheme is expected to rely on a consortium of
international investors. More detailed information is so far unavailable:
neither the Ministry of Finance, ING, nor the IMF, are interested in leaking
information, which could be used to initiate a separate court action.

 

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