Ukraine Skirts Argentine Default Path as Premier Survives

Ukrainian lawmakers backed a tax increase needed to qualify for a $17 billion bailout by the International Monetary Fund and rejected the prime minister’s resignation after warnings that the country risked a default.

“The first major economic news today is that Argentina went into default,” Prime Minister Arseniy Yatsenyuk told lawmakers after the vote today. “And the second is that Ukraine didn’t default, and it never will.”

Ukraine is relying on the IMF’s funding for its budget needs and for making about $10 billion in foreign debt payments by year-end. The Washington-based lender’s mission urged the government and the legislature to adopt austerity measures before its board decides next month on the second disbursement of a $1.4 billion tranche.

Parliament turned down Yatsenyuk’s resignation submitted last week in protest over lawmakers’ failure to approve the bills required by the IMF and needed to finance a military push against pro-Russian separatists in eastern Ukraine. Budget and tax code amendments adopted today allow the cabinet to avoid complications with IMF program revisions in the future given lawmakers’ reluctance to back unpopular bills, said Oleksandr Parashchiy, head of analytics at investment bank Concorde Capital in Kiev.

Argentina missed a deadline yesterday to pay $539 million in interest after two full days of negotiations in New York failed to produce an accord with creditors from its last default in 2001, with Standard & Poor’s saying the country is in default.

Problems Solved

The vote “solves most of Ukraine’s problems up to the end of 2014,” Parashchiy said by phone. The government has prepared “a back-up” for the rest of the year to avoid further revisions of budget spending and economic forecasts every time an IMF mission comes to Ukraine.’’

Ukraine’s economy shrank more than analysts predicted in the second quarter, contracting 4.7 percent from a year earlier, in the wake of months of bloody fighting against insurgents. The conflict is disrupting trade, weighing down an economy that’s contracted in seven of the past eight quarters.

While the IMF sees Ukraine’s gross domestic product declining 6.5 percent this year, the government predicts a 6 percent slump in the amended budget approved today.

Extra Pessimistic

The government’s economic forecast is “extra-pessimistic’ and provides some room if the situation deteriorates further, Parashchiy said.

The yield on Ukraine’s 2023 note fell six basis points to 8.48 percent. The hryvnia weakened 0.1 percent to 12.2509 per dollar, having declined 33 percent this year, the worst performance among more than 170 currencies tracked by Bloomberg after Ghana’s cedi.

Today’s vote also marked a comeback for Yatsenyuk following his bid to resign. Two political parties left the ruling coalition last week, paving the way for snap parliament elections this autumn, which President Petro Poroshenko said today are ‘‘inevitable.”

“I’m not seeing an adequate replacement for Yatsenyuk now, especially given that he’s been carrying out talks with the IMF,” Oleksiy Haran, a professor of comparative politics at the Kyiv-Mohyla Academy, said by phone. “Yatsenyuk has a chance to remain prime minister after elections, and this will depend on the format of the coalition in parliament.”

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