Saving Ukraine: Why the IMF’s Bailout May not Work

Saving Ukraine: Why the IMF’s Bailout May not Work

Could last week’s ceasefire in Ukraine, announced in Minsk Thursday after 17 hours of negotiation, have been any more dramatic? The German and French leaders, who presided in the Belarus capital, leapt into 11th hour action when Washington disclosed it was planning to arm Kiev against rebellious regions in the east. As of this weekend, the deal is holding and the Obama administration has backed off.

But this is a long way from over. Apart from the many ambiguities in the Minsk II Protocol requiring clarification, the International Monetary Fund’s revived bailout plan, announced simultaneously as part of a plainly concerted effort, has barnacles all over its hull.

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Bailouts are the IMF’s business, but this one is probably unprecedented, given Christine Lagarde, the fund’s director, has just agreed to extend a $17.5 billion lifeline to a government fighting a crippling civil war. Over the decade of its Ukraine program, the IMF’s rescue will require $40 billion.

It’s problematic. At the very least, negotiating the terms by which foreigners holding Ukrainian debt are satisfied will take many months, and it’s a question whether Kiev can afford such a delay in the IMF’s disbursements. One of these creditors is Russia.

Just as Chancellor Merkel and French President François Hollande have a long things-to-do list in getting Minsk II implemented on the ground, so does Lagarde:

• Lagarde asserted as recently as January that as a matter of standing policy the fund can’t lend to nations at war. Unless she wants to insert the IMF into Ukrainian politics by taking Kiev’s side, this means all fighting has to stop definitively. “The great question,” Michael Hudson, an economics professor at the University of Missouri said in a recent interview, “Is thus when the IMF will even begin to release the loan it has been discussing.”

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• Neither can the fund lend to insolvent nations, according to its articles of agreement. Have you looked lately? Ukraine’s insolvent by any measure short of a formal declaration.

• Government and multilateral pledges are significant parts of the plan. The EU is in for $2.2 billion and the US for $2 billion. Germany, Japan, and others are committed to giving $1 billion more. Institutions including the

World Bank, the European Bank for Reconstruction & Development and the European Investment Bank are in for $4 billion. This is a crowded room. Given Ukraine’s political, military and economic fragility, by what criteria will all these decide to deliver?

• Foreign bondholders have to get a haircut, and Natalie Jaresko, Ukraine’s new finance minister, told Bloomberg by e-mail Friday it may come to $15 billion. This kind of private-sector involvement in an IMF program has no precedent and negotiating terms will take time. Problem No. 1: Bondholders’ cooperation is a condition of IMF disbursements. No. 2: Kiev proposes exactly the terms—extended maturities, reduced interest rates, a possible write-down—that the EU now insists Greece cannot be permitted.

• Of Ukraine’s $16 billion in outstanding bonds, the Russian sovereign wealth fund holds $3 billion. This is tricky for evident reasons. Two months ago Wolfgang Schaüble, the German finance minister, asked his Russian counterpart (a little shamelessly under the circumstances) to restructure this debt, and Moscow has so far declined. It may change its mind now to keep Minsk II afloat, but it could also scuttle the entire program if it so chose. And since Kiev must treat all creditors equally, if Moscow wants a better deal all others can demand the same.

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• More broadly, the IMF’s conditionality is typically stringent, and the risks of this degree of austerity are amply demonstrated across Europe. Greece is now in depression because it simply had too little resilience to withstand the discipline, and Ukraine’s economy is in far worse condition than Greece’s at its most dire.

• Neither can social and political risks be ignored. Ukraine is about to submit to the “shock therapy” applied in Eastern Europe after the Soviet Union’s collapse. But Ukrainians are a more highly politicized population 20 years on. To boot, Kiev remains unhealthily dependent on far-right extremists—in government and in the war—and some German ministerial officials already worry this could create an opening for these elements to take over.

Soufflés rise and thrill those assembled as they come out of the kitchen. Minsk II and Lagarde’s Ukraine program are a pair of them. Collapses are a danger, though, as any chef knows. They come quickly, too, and disappoint the diners.