The hryvna’s long descent has picked up speed, shining an unflattering spotlight on the country’s leaders as they sought to reassure the world there would be no Russian-style financial meltdown in Ukraine.
With the hryvna trading 3.37 to the dollar set at the start of the month, National Bank chief Viktor Yushchenko said he stood by a trade-band policy that commits the government to stopping the hryvna from falling below 3.5 to the dollar.
‘If we lose control over the hryvna’s rate, it will be a heavy blow to Ukraine and its banking sector,’ Yushchenko was quoted by the Interfax news agency as saying.
Yet the government seemed to have already lost control, and Yushchenko gave no indication what the government would do to regain it. Last week, the National Bank was forced to abandon a months-long effort to defend the hryvna by spending its hard-currency reserves.
On the street, hryvna were selling for 3.6 to 3.7 to the dollar, while in unofficial trading and most importers’ internal accounting the hryvna was already pegged at more than 4 to the dollar.
In the first week after the crisis hit in Russia, Ukraine seemed to be relatively solid. As the ruble dropped through the floor, the hryvna kept to a gentle slide, and as Russia openly defaulted on its massive T-bill debts, Ukraine’s leaders promised at worst voluntary postponement on favorable terms.
Since then, the ruble has partially recovered and then fallen again, while the hryvna’s slide has gradually picked up speed. By Monday, the hryvna had lost about 35 percent of its value on the Interbank Currency Exchange since the start of the crisis, while less controlled markets were expecting that spread to widen to 50 percent in the near future.
Meanwhile, the hryvna’s plummet was adding injury to insult for investors in Ukraine’s treasury bills.
As government officials continued to quibble with international investment agencies that have called Ukraine’s T-bill conversion offers ‘defaults,’ a group of investors managed to redeem Hr 199 million worth of T-bills issued via Merrill Lynch that came due on Sept. 22.
Investors holding Hr 176 million worth of the bills agreed to convert them. The Hr 375 million Merrill Lynch bond issue was hedged against devaluation at a minimum of $170 million when it was issued.
However, as the Post went to press, investors paid in hryvna were still waiting to find out whether the National Bank would provide them with a mechanism to convert the hryvna proceeds into hard currency at a rate that would fulfill that minimum-dollar-yield promise.
Moreover, by effectively adding Hr 199 million hryvna worth of demand for dollars at a time when demand was already spiking upward, the pay-off only added to the downward pressure on the hryvna.
Overall, talks with holders of Ukrainian government paper have resulted in voluntary conversion of some 60 percent of Hr 1.274 billion in government debt. The International Monetary Fund has demanded that Ukraine convert at least 80 percent of its T-bills in order to continue receiving the organization’s low-interest loans.
On the other hand, the IMF also demands that all T-bills either be paid on time or converted voluntarily.
The problem may well be that Ukraine does not have the dollars necessary to keep its word to all its investors. Ukrainian hard currency reserves currently stand at $1.08 billion. Its total obligations stand at roughly $1.7 billion, and sales of additional bonds in today’s market is highly unlikely.
The only other way to cover that $600 million gap would be with IMF money. But another IMF condition on releasing that money is that Ukraine have hard currency reserves of $1.33 billion by the end of September.
‘It is impossible to comply with the demands of the International Monetary Fund,’ said Adam Martynyuk, the parliament’s Communist deputy speaker. ‘We can’t do everything they ask.’
Caught between IMF conditions and desperate to keep its battered credit rating afloat, the government has delayed the deadline for accepting its T-bill conversion offers 3 times in the last month. The latest deadline for accepting postponement of T-bill redemptions, announced on Friday, is Oct. 2.
‘This may be their last chance to exchange,’ said Finance Ministry spokeswoman Iryna Bezverkha. While stressing that its conversion offers are voluntary, the government has sought to scare investors into believing they must convert or face worse terms later – one of the main reasons investment agencies say the offers constitute default.
But while Western bankers lose sleep over Ukrainian exposure and Kyiv bureaucrats pick nits about the definition of the word ‘default,’ the public has registered its own response.
Depositors have attempted to pull savings out of banks, many of which hold masses of government T-bills as assets and could go belly-up if those T-bills become worthless.
In spite of government threats that banks should give customers cash on demand or face fines, Ukrainian banks were processing cash withdrawals not on demand but in weeks.
The arrival of the first installment of a $2.2 billion IMF loan and additional millions of World Bank and European Bank for Reconstruction and Devlopment money have failed to halt the near-panic.
Nonetheless, some members of the government registered less-than-guarded optimism.
‘We hope [that in 1999] gross domestic product will grow by 1-2 per cent,’ said Economics Minister Vasyl Rohovy. ‘Adoption of … crisis legislation will make it possible to minimize or stave off in general the GDP decline next year.’ Some economic analysts even predicted deflation for 1999.
The administration called on the legislature and the public to work for the common good and positive growth.
‘The Verkhovna Rada should support the efforts by its leadership and constructively minded deputies to direct its work towards cooperation. … [We need] urgent work, rather than endless and fruitless discussions,’ read an open letter from President Kuchma to the parliament released on Friday.
