Ukraine is still holding strong, posting 6.6 percent real gross domestic product growth year-on-year in the third quarter, up from 3.8 in the previous quarter.
But growing problems in the region may quickly put an end to that.
The recent Eurozone summit was hailed “the summit to end all summits,” the ultimate solution to Europe’s ever-escalating debt crisis.
After pulling an all-nighter on Oct. 26, Eurozone leaders agreed on a three-part solution to save both the single-currency union and debt-laden Greece: a “voluntary” agreement by banks to write down 50 percent the value of their Greek bonds (around 100 billion euros), recapitalizing those banks with 106 billion euros, and boosting the European Financial Stability Fund, a “firewall” meant to protect Europe from speculators, to 1 trillion euros.
The relief lasted almost two full days. Most experts now claim the debt write-down was too small, pointing to the International Monetary Fund’s recommendation of 75 percent.
Indeed, the present package, whose details are yet unknown, will only reduce Greece’s debt from about 160 percent of gross domestic product to 120 percent in 2020 – the same level as in the beginning of the crisis.
To top it off, Greece’s Prime Minister George Papandreou drove markets into a frenzy by announcing a referendum on the package, hoping to force a recalcitrant opposition to cooperate.
This, however, sent the yield on Italy’s 10-year bonds to over 6.3 percent, the highest level since the country joined the euro. It is widely seen as unsustainable for Italy, the world’s eighth biggest economy and next domino in line after Greece.
Indeed, the situation is now so serious that Nobel prize-winning economist and New York Times columnist Paul Krugman wrote that it no longer seems a question of “if” Europe will collapse, but rather “how the final act will be played.”
Meanwhile, trouble is also brewing to Ukraine’s east. The Central Bank of Russia forecasts capital flight of $20 billion in the fourth quarter, as investors and oligarchs grow increasingly concerned about the country’s persistent economic problems and a deteriorating political climate.
While in the short run this year’s exceptional harvest and preparing the 2014 Winter Olympics will shore up growth, Russia, along with other economic powerhouses like China or India, is looking at a slowdown that will inevitably depress commodity prices. It also reduces chances of a compromise on gas prices for Ukraine.
With the European Union and Russia accounting for over half of Ukraine’s commodity-dominated exports, this is bad news for Ukraine.
A further concern is that troubled banks, particularly the hard-hit European ones (France’s BNP Parisbas lost 13 percent or $4 billion in market valuation on Nov. 1) which account for a fifth of the market in terms of assets, may be tempted to pull local branches, or get out of the troublesome Ukrainian market altogether. Indeed, Sweden’s Swedbank has already announced it will reduce its 170-branch network down to 10, citing Ukraine’s “risky” market.
Limited banking liquidity on the domestic market is also taking its toll. For the first time since their creation in September, there was no demand for dollar-indexed government bonds at the Nov. 1 auction.
Regular hryvnia bonds are also finding no buyers despite short-term yields of over 20 percent. With external debt repayments on the rise and dwindling foreign reserves, Ukraine is in dire need of a new IMF loan. Yet with the second wave of the crisis all but upon us, the big question is: Will it be enough?
Kyiv Post staff writer Jakub Parusinski can be reached at [email protected]
