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

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.