The Ukrainian finance ministry says it needs $35 billion in aid over the next two years to avoid default. The country had been relying on a $15 billion Russian rescue package to service its debt. $12 billion of that deal is still to be delivered, and it’s unclear whether that will happen while former president Viktor Yanukovich remains a fugitive.
That said, the fiscal future of the Ukrainian government, now headed by interim presdient Olexandr Turchynov, is looking markedly more stable than it was last week, going by prices in the bond market. CDS on 5-year government bonds fell 15% today, and yields on the 10-year benchmark bond fell to a three-week low of 8.975%.
On Friday, S&P cut Ukraine’s long-term credit rating from CCC+ to CCC, saying “it’s likely that Ukraine will default in the absence of significantly favorable changes in circumstance”. Deutsche Bank, looking at the CDS market, puts Ukraine’s annualized chance of defaulting at just over 12%.
The country’s economy has serious structural issues. Ukrainian consumers pay just 20% of their country’s wholesale energy costs, leaving the state on the hook for the rest. Since 2009, Ukraine has been put in a further bind: it agreed to a 10-year deal to buy Russian gas at above-market prices.
One possibility is for the the World Bank or International Monetary Fund to offer a multi-billion dollar loan package. But a long-term package from from either group will likely have to wait until there’s an elected government to deal with, and would come with conditions like currency reform and budget cuts that are unlikely to be well received by a democratically elected government. In the meantime, short-term aid from the EU and the IMF is a possible stopgap measure.
There’s always the possibility that Russia could re-enter the discussion with a new aid offer, or continue to provide the remainder of the earlier $15 billion deal. “Moscow doesn’t send tanks into revolting former vassals any more. It sends dollars,” says FT Alphaville’s Joseph Cotterill. Russia can halt that flow of dollars quite quickly, and resume it just as rapidly. -- Ben Walsh
On to today’s links:
Must Read
After Indian farmers commit suicide, debts still haunt their families - NYT
Charts
Debunking the myth of America's manufacturing "renaissance" - Oya Celasun, Gabriel Di Bella, Tim Mahedy, and Chris Papageorgiou
Why you shouldn't give money to highly-selective colleges: inequality - Matt Yglesias
Helpful Excuses
You can now blame your ancestors for much of your economic fate - Gregory Clark
Monopolies
The smarter way to fight the cable company monopolies? Cut down regulations - Jack Shafer
Comcast's deal with Netflix represents "a fundamental shift in power in the Internet economy" - Timothy Lee
Why Netflix shouldn't pay Internet providers - Guan Yang
Trends
The world could reach "peak car" in the next decade - Bloomberg
Alpha
Ackman explains his bet on Fannie and Freddie - WSJ
Oxpeckers
Why video won't save online journalism: it's expensive, and neither readers nor advertisers want it: - Dylan Byers
"Forbes is an obvious fraud. It is just... a user comment site" - Michael Wolff
Ugh
The Texas fracking boom: toxic clouds, health concerns, and companies policing themselves - Lisa Song, Jim Morris, and David Hasemyer
Wonks
Why rational people can't be good economic forecasters - Justin Fox
Housing
Is the weakness in the housing market just temporary? - Bill McBride
Pivots
Fabrice Toure is teaching Elements of Econ Analysis 3 this spring quarter - University of Chicago
Billionaire Whimsy
A supersonic private jet with HD screens for windows - Animal New York
Study Says
Being called out for racial bias reduces racial bias - Brookings
Dishonesty makes you more creative - Pacific Standard
Facebook
Facebook is becoming a P&G-style brand holding company - Dave Knox
New Normal
New trend: people naming their kids after guns - Tyler Cowen
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