Ukraine’s Debt Dilemma
Ukraine’s short-term liquidity problems will test its ability to meet its debt obligations, which is both unfortunate and avoidable. Indeed, Ukraine’s struggles highlight the need for an agreed framework to resolve sovereign-debt problems and govern IMF lending.
CAMBRIDGE – Insecurity is haunting Ukraine – and not just geopolitical insecurity, but economic insecurity as well. Output is in freefall. The country’s external deficit is exploding, and borrowing costs have spiked precisely as financing has become imperative.
The International Monetary Fund has recognized the danger, approving a $17 billion loan in April to stabilize the economy and avert default. But the Fund was overly optimistic about Ukraine’s prospects and its ability to fill the financing gap. It is now clear that $17 billion will not be enough.
The IMF had hoped that tensions with Russia would ease, allowing other lenders to step up. Instead, continuing conflict has complicated risk assessments and curtailed Kyiv’s access to external finance, raising the likelihood of a disruptive debt default.
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