Ukraine Gets an IMF Bailout

The IMF has agreed to lend Ukraine $16.5 billion, helping the country to avert a run on its banks and its currency, the hryvnia

By Jason Bush

SERGEI SUPINSKY/AFP/Getty Images

The victims of the global financial crisis just seem to be getting bigger and bigger. First it was financial institutions, then came entire countries. After Iceland, the latest domino to wobble is Ukraine, which on Oct. 26 reached an agreement with the International Monetary Fund for a $16.5 billion bailout.

Ukraine desperately needs the money to stave off a run on its banks and currency. With ordinary depositors rushing to withdraw their cash, one major Ukrainian bank, Prominvest, is in receivership and faces possible nationalization, while a second, Nadra, has been rescued with a $300 million central bank loan. Meanwhile, the Ukrainian currency, the hryvnia, has fallen sharply. "People are still worrying about the currency, and continuing to convert their savings into U.S. dollars," Olena Bilan, an economist at Dragon Capital brokerage in Kiev.

Ukraine is hardly the only country in Central and Eastern Europe feeling the financial heat. Just a day after the rescue package for Ukraine, Hungary's government also revealed that it is in negotiations with the IMF (BusinessWeek.com, 10/14/08), expected to be concluded in the next few days. Belarus, a country once loath to have dealings with the West, has recently requested IMF help (BusinessWeek.com, 10/23/08) to replenish its depleted reserves. Even Russia, a country that enjoys massive foreign exchange reserves and a healthy trade surplus, now faces a full-scale financial crunch, forcing the government to provide hundreds of billions of dollars in emergency finance.

Borrowed Billions from Banks

And if oil-rich Russia has problems, then pity the poor Ukrainians, whose country is even more dependent on foreign loans to keep its economy humming. "They want the Western banks to start lending again," says Frank Gill, director of European sovereign ratings at Standard & Poor's (MHP) in London. "But the principal reason Western banks have stopped lending has nothing to do with Ukraine. This is a classic exogenous shock, exacerbated by highly leveraged banks with poor asset quality."

During the good years, Ukraine's banks and companies had few qualms about taking out billions of dollars in short-term loans from international banks. Now much of that debt has to be repaid, but the global credit crunch means that there's simply no more money available to refinance loans. "Any company that needs to refinance a foreign loan essentially goes bankrupt," says Anders Aslund, senior fellow at the Institute for International Economics in Washington and an adviser to the Ukrainian government.

Ukraine's foreign debt has risen from $54 billion at the start of 2007 to over $100 billion today. Overall bank lending grew by some 75% last year, as foreign banks rushed to set up in the country. The risks have been amplified by a common practice of extending hard-currency loans to local households and companies, whose debts will spiral dramatically if the Ukrainian currency continues its downward slide.