Sunday, October 19, 2008

Ukraine and the IMF Enter Loan Negotiations Amidst Political Uncertainty

Sources: Financial Times, IMF Ready to Help Stabilise Ukraine; Financial Times, Ukraine May Borrow up to $15 bn from IMF; New York Times, Political Turmoil Jeopardizes Financial Relief for Ukraine

In talks Thursday and Friday, Ukraine looked to the IMF for a loan of $10 to $15 billion in order to stabilize the financial system and avoid future disasters. Financial problems there include foreign investors pulling their money out of the country, reduced credit lines from foreign banks, falling steel prices, rising costs of gas imports, and a general need to ensure trust in the economy. However, Ukraine insists that it is not yet experiencing a financial crisis and that this is a precautionary measure.

The total amount of the loan has not yet been set, but it is possible that Ukraine may sign early this week. An IMF delegation in Ukraine is planning to study economic conditions in the country, and Ukrainian officials claim that Western assessments of risk there are exaggerated despite the fact that Ukraine already was facing $100 billion of foreign debt in July.

One complication to negotiations with the IMF is that the IMF may not know exactly whom to negotiate with. After political troubles, the Ukrainian President decided this month to dissolve Parliament. Courts are currently determining whether the dissolution was in fact valid, but until that time it is uncertain whether the Cabinet has any authority. In the meantime, the IMF is hoping for a guarantee that 2009 budget will be balanced before signing off on a loan, and normally it would be the Cabinet providing that guarantee. If the IMF negotiates with the Cabinet and the court ruling finds the dissolution valid, it will have to wait until a December 7 election to find a valid negotiating partner.

1) Given the political uncertainty in Ukraine, should the IMF be negotiating this loan before a court hands down a decision on the validity of the President’s action?
2) This is the first time the IMF has made a move towards bailing out a country on the European continent during the financial crisis. Do you think this need is likely to spread throughout the poorer European countries?

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