As Russia and the West brings in more troops, fighter jets, destroyers, missiles and artillery, Ukrainians are taking their money out

 

…given the recent experience of IMF programs it is natural to ask whether some form of ‘private sector involvement’ (PSI) will be proposed as part of any package of support.

 

The IMF itself recently published a consultation paper arguing that private sector debt restructurings had “often been too little, too late” and that the fund should look at ways to avoid its “resources eing used simply to bail out private creditors”. The ongoing consultation process which this paper initiated is one reason why concerns over IMF-sponsored restructuring are more prevalent for Ukraine now than they have been in similar situations in the past. However, we think it unlikely that there will be  insignificant change in the Fund’s approach towards Ukraine, given that the consultation is still ngoing, views are divided and its outcome remains uncertain. Nevertheless, that does not mean that some form of PSI will not be considered, condoned, encouraged or even mandated and so it is useful to consider the pros and cons from the perspective of the Ukraine (and its potential official sector financiers) and the implications for private sector creditors.

 

 

 

 

 

 

 

 

 

 

 

…current market prices are relatively consistent with such a scenario of PSI-lite. Indeed, the current relative pricing of Ukrainian bonds are very unusual: the pricing of short-dated bonds are distressed, implying a relatively high probability that they won’t redeem at par, but on the other hand the narrow range of prices across the curve suggests that the market assumes a high recovery in the event of a default/restructuring.

Such pricing would be fair, considering a baseline scenario involving an IMF program and an orderly adjustment. However, it leaves little compensation for a more disorderly scenario. Tensions with Russia show no sign of abating and could escalate further. Also there is no guarantee that the new government has a strong enough popular mandate to carry through the necessary reforms. PM Yatseniuk has emphasized that the road ahead for Ukraine will not be easy, but only time will tell how united the country will be in following the path he intends to take.

 

One might wonder just how long the leadership would remain in place if they began confiscating private citizens money?