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Possible collapse of the Ukrainian debt market might be dangerous

Author : Olexandr Honcharov

Ukraine's financial authorities are creating financial pyramids based on the debt pyramids
11:00, 27 August 2018

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How does the hryvnia issue work today? By and large, it is used for the purchase of Ukrainian government bonds. And what determines the issue of the domestic government loan bonds (DGLB)? When answering this question, we are actually facing a classical financial pyramid. In particular, when preparing the state budget-2018, the most important item of expenditure and for at least the next two years is servicing of the previously taken obligations. Ukraine’s Ministry of Finance issues more and more government bonds to pay off old debts. This means that our financial authorities are creating financial pyramids based on the debt pyramids. Accordingly, already this year (2018), under adverse conditions, the national debt market might collapse.

Related: What hryvnia exchange rate we expect by the end of 2018

I think none of the experts and analysts had any doubts about the situation with the state banks and the National Bank (NBU). They have huge "shoulders" in these financial pyramids. And if the collapse in the bond market begins, all these pyramids will fall, as it happened during the 2008 year crisis. The public debt for June 2018 has amounted to $ 76.3 billion (of this amount, 60%, or $ 47.2 billion are external borrowing, which includes $ 9.6 billion of state-guaranteed debt, and the rest is the direct debt of Ukraine in the form of Eurobonds); in national currency - obligations to 625 billion UAH ($ 23 billion), which is 30% of the total debt, of which more than half, namely 56%, is owned by the National Bank. This hidden hryvnia issue led to an aggravation of imbalances and, ultimately, to new rounds of inflation and devaluation of hryvnia.

About a third of government bonds, or 36%, is owned by state-owned banks, the great share of which was directed to capitalization of banks; The remaining volume of government bonds, or 8%, is held by private commercial banks, individuals and legal entities, as well as non-residents. What do these impartial and frightening figures attest? The financial authorities are planning and placing more and more issues of hryvnia and government bonds. Well, many of our citizens have experienced it for a long time, like any financial pyramid, sooner or later, it would collapse.

Related: Exchange rate for the hryvnia becomes more optimistic

After all, more commitments mean more emissions. Clearly, investors see this dangerous trend. Therefore, this week, the demand for government hryvnia bonds has fallen.

The financial market specialists realize that the issue of domestic government loan bonds, as a system, entered the peaking regime, followed by the most undesirable result - self-destruction. In turn, our banking system, which is already barely managing the maintenance of very expensive liabilities (for example, the same deposits at 18-20%), can fuel the possible fire. Small and medium-sized businesses, credited in commercial banks, has 12-15% profitability. It is quite logical to expect that there will be a cash gap in the banking sector.

Related: Big Mac Index reveals Ukraine’s hryvnia undervalued by 69%

Of course, all these increases in the NBU's discount rate, tariffs, and prices for energy resources, individual taxes are very painful for small and medium-sized businesses. And then comes a wave of corporate defaults and the inability to service bank loans. Accordingly, the solvency of the population does not increase, on the contrary, it quickly falls under the conditions of hryvnia devaluation and double-digit inflation. What does business do in these conditions? First of all, they try to put increases in taxes, and tariffs on the Ukrainian consumer.

Yes, the financial authorities have now created the conditions for the Ukrainian banks. Moreover, they increased the size of the currency position, creating even more favorable conditions for currency speculation, which makes it unprofitable to lend to the Ukrainian producer. A resigned and patient consumer should prepare for another blow to his wallet through a cash gap in the banking system. That is why almost all of the Ukrainian elite trust the US dollar, fearing inflation and devaluation. Our establishment perfectly understands that the practice of the financial authorities says one thing: if you want to save savings, you should not have hryvnia.

Related: Hryvnia bears the cost of mistakes of Ukraine's Cabinet and Parliament

As for today, the NBU has established the following rates of major currencies in relation to the hryvnia: 27.85 UAH for 1 USD and 32.25 UAH for 1 USD. In the very beginning of autumn, the National Bank will establish 28 UAH.

Finally, any financial explosion (for instance, of the corporate bonds) will cause a powerful effect of flight to quality and on the drawdown of Ukrainian markets we will get a very powerful outflow of capital from the country. The International Monetary Fund might easily provoke such an explosion. The question is a question of time when the fall of the bond market will begin. If this fall begins, then everyone will run from high-yield government bonds and we will get a sharp fall in our debt market, as well as a strong devaluation of hryvnia.

Read the original text at 112.ua.

This column does not necessarily reflect the opinion of the editorial board or 112.International and its owners.

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