IMF looks to stave off looming Ukraine default

The second-in-command at the International Monetary Fund heads to Ukraine this weekend to gauge whether its Western-backed leaders are committed enough to overhauling their crippled economy to justify another financial lifeline.
The Fund's First Deputy Managing Director David Lipton -- a White House veteran who spearheaded the US response to the 1998 Asian financial crisis -- will arrive in a war-scarred nation that stands helpless in the face of a looming debt default.
The former Soviet republic of 45 million has already burned through $8.2 billion (6.6 billion euros) in global aid issued since the February ouster of a corruption-stained president who survived off Russian support.
Those loans were part of a $27-billion international package that included a $17.1-billion pledge from the Fund itself.
The architects of the package had hoped to use it as an incentive for Ukraine to wean itself off Communist-era subsidies long abandoned by its smaller but now far-better-off neighbours in eastern Europe.
The Fund also wanted to see loss-making state firms privatised and graft that has permeated both ministries and local governments comprehensively punished instead of being swept under the rug.
Few of those steps have yet been taken -- although President Petro Poroshenko has promised to ram a lean and market-friendly budget through parliament by the end of the year.
But the IMF fears this may no longer be enough.
- A matter of survival -
The Fund's economists now warn that Ukraine, which has been all but cut off from trade with Russia and whose industrial heartland has been crippled by a pro-Kremlin revolt, may grind to a standstill without another immediate payment of $15 billion and additional debt relief.
Ukrainian Prime Minister Arseniy Yatsenyuk on Thursday called it a matter of the country's "survival".
Concerned IMF and US officials have been talking up Poroshenko's potential as they try to convince world powers to open up their purses for Ukraine once again.
Yet the Wall Street Journal reports that fears of recession in Europe and slowing growth in China mean the G7 group of most developed economies is only talking about a $4-billion short-term package.
"It's not going to be easy," another person involved in the negotiations told the Financial Times. "There's not that much money out there."
Ukraine has also appealed for $2 billion in further help from the European Union. No decision on that request has been announced.
- From bad to worse -
Ukraine's economic statistics make for grim reading -- even compared to Russia, which is shackled by Western sanctions and collapsing energy prices.
The economy is on course to contract by seven percent this year and more still in 2015.
Output in the separatist-controlled industrial east -- once responsible for 16 percent of Ukraine's gross domestic product -- has slowed by a fifth and exports to Russia are down by a quarter.
The Ukrainian currency has nearly halved in value against the dollar, falling from 8.24 hryvnias against the greenback at the start of the year to 15.76 hryvnias on Friday evening.
And inflation is on track to reach 20 percent for the year.
These problems may be compounded if Russia demands the early repayment of a $3-billion loan it gave the ousted regime last year in return for its refusal to strike a landmark EU deal.
Moscow reserves the right to insist on a payback should Ukraine's debt-to-GDP ratio rise above 60 percent -- a condition economists think has already been met.
"This is all down to the radical deterioration in relations with Russia and the military activities in the (industrial) east," Kiev's Concorde Capital investment bank analyst Oleksandr Parashchiy said.
- Shock therapy -
Economists believe Poroshenko has no choice but to absorb the fierce public resentment that will come from slashing social benefits and hiking prices on everything from electricity to public transport.
"The only question now is how this is going to be done. We are either looking at 'shock therapy' or a more gradual system," said Parashchiy.
Analysts believe that either approach would satisfy Lipton and his IMF team as they seek to keep Ukraine progressing along its bumpy westward course.
But they stress the president must present some of sort of financial recovery blueprint that can convince other global lenders to pitch in.
"The most important thing the IMF wants to see is a plan for cleaning up state finances," said Oleksandr Valchyshen of Investment Capital Ukraine.