Sunday, October 26, 2008

IMF Approves Loan to Ukraine

Sources: Bloomberg, IMF, Ukraine Reach Agreement on $16.5 Billion Loan; BBC, Ukraine Set for $16.5bn IMF Loan; Reuters, IMF, Ukraine Agree $16.5 Billion Loan with Conditions

The IMF agreed today to loan Ukraine $16.5 billion over two years to maintain its financial stability, but the loan is contingent on banking sector reform and balancing the budget. The money is intended to help Ukraine adjust to the external pressures of the global financial climate, control inflation, and increase liquidity in the financial sector. The economy is currently under pressure from factors including falling steel prices, rising energy costs, a falling currency, and foreign investment expected to decline.

Though the loan is generous, it will not fix all of Ukraine's economic problems. In the short-term, it will help to restore depleted Central Bank Reserves, which are being used to prop up the currency. It can also relieve tensions in the banking sector in the short term. Ukraine's stock market, however, has experienced a 60% drop since the beginning of September, and analysts do not expect the loan to result in a significant stock price recovery.

Political unrest poses a challenge as well, because Parliament will have to reach some agreement in order to pass legislation that will implement the necessary reforms. The President has suspended his decree dissolving Parliament in order to let Parliament consider financial legislation, but supporters of the Prime Minister have blocked proceedings to avoid any legislation financing the December election. Furthermore, the two proposed legislation packages to address the financial crisis may not meet the IMF's conditions. Neither bill is particularly detailed, and passing any bill may be difficult due to the unpredictability of the legislators.

Though Ukraine is the first country in the region to make a deal with the IMF for assistance, the institution is also currently in talks with Belarus and Hungary. Throughout Eastern Europe, projected declines in foreign investment are a problem, and stocks in emerging markets have been performing poorly.

Questions:

1) Do you think IMF loans to countries in Eastern Europe will make a significant difference in the progress of the credit crisis?
2) Are markets in the region sufficiently insulated to avoid contagion from Hungarian financial trouble, or is the crisis likely to get worse before it gets better?

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