Category Archives: Ukraine CDS

27/3/15: Inching toward default: Ukraine CDS


Ukraine default scenarios (and debt restructuring) is now in the front line news, especially with IMF declaring then un-declaring its distaste for Russian position on EUR3 billion debt Ukraine owes Moscow that is due this year: http://www.reuters.com/article/2015/03/27/ukraine-crisis-imf-idUSL2N0WS1FO20150327. So much so, even Reuters are confused...

But here's the markets absent any confusion: Ukraine CDS are now trading with implied probability of default of 98.2%.


Source: @Schuldensuehner 

Which is, at this stage, only a question of whether or when the ISDA call the default.

Whether you like it or not, Ukraine needs to restructure its debts. Its economy cannot carry the interest burden and it cannot sustain any sort of recovery absent a significant debt writedown. Lending to the country to repay some of these debts is madness of highest order - so much so that even the IMF knows it. Even if Ukraine gets a massive writedown of debt, it will have years of extremely painful reforms ahead of it, and its economic development model will have to be re-written in its entirety. But at least the Ukrainian people will be able to think of this pain as not going to fund foreign legacy lenders. A small consolation, but a necessary one.

23/2/15: Ukraine CDS-implied Default Rate Shoots Above 97%


As noted by @Schuldensuehner Ukraine's probability of default is now just shy of 97.1%:


Which is spectacular in its own right. But one has to consider what this market pricing really implies.

As we know, Ukraine will receive super-senior debt injections courtesy of the IMF. This will alleviate the immediate crunch on Government liquidity (Ukraine FX reserves are now below scheduled debt redemptions for March-September). So the above risk spike cannot be attributed to the risk of liquidity crisis.

As I explain here: http://trueeconomics.blogspot.ie/2015/02/18215-imf-package-for-ukraine-some.html , this liquidity support comes at a hefty cost: the debt burden that will result from the international lenders intervention will be non-sustainable and it can exacerbate popular discontent with current Government.

Now, the latest news from the Eastern ATO are pretty disastrous, and, arguably, also unlikely to go well with the Ukrainians.

This is of course speculative, but given lack of the risk around future liquidity crunch, the latest spike in the CDS spreads suggests that the markets see serious political risks ahead soon.