Ukraine: The Dreaded ‘D’ Word
As the macroeconomic and financial market maelstrom continues to engulf the Emerging Europe region, one of the questions I’m asked most is the prospects for sovereign defaults in 2009. With benchmark government bonds and CDS spreads across the region continuing to widen towards record levels, the fears of the dreaded ‘D’ word seem to increase by the day. Indeed, the questions keep coming: Given the ongoing depreciation in every currency throughout CEE, the dwindling stock of foreign reserves held by central banks, in addition to the rapid unwinding of economic activity, which countries will be the first to wave the white flag of surrender, and give up on their external repayment obligations?
Unfortunately, for the time being I’m not ready to call who will be the Ecuador of Europe in 2009. Surely, the most likely candidate for default would be Ukraine, whose problems I’ve discussed ad nauseam on this forum. While nobody can discount or underplay the severity of the economic and financial market crisis in the former Soviet republic, I stick to my core view that a sovereign credit event is not a part of the core scenario. With a relatively low level of public sector external debt, in addition to a benign repayment schedule this year, I figure the government should still have the ability to meets its external repayment obligations.
The same can pretty much be said for every other state across the Emerging Europe region. Indeed, though the problems plaguing Ukraine are being replicated across the region, albeit certainly to a lesser extent (and minus the armed secret service agents storming into the headquarters of public companies), I continue to be encouraged by the relatively low levels of external debt held by the public sector.
THAT SAID, while sovereign defaults remain outside my core scenarios for the Emerging Europe region in 2009, I nevertheless caution of the increasing likelihood of a wave of corporate and banking sector defaults going forward (particularly in the “high-risk” countries such as Ukraine). Indeed, though the public sector has previously been relatively prudish in its appetite for external debt, the story is dramatically different in the private sector, whose previous binging on cheap credit has pushed them to the brink of obesity. Change that. These guys have far surpassed the brink of obesity. They’re well-ready for triple bypass heart surgery and a few laps in the pool, in my view.
Unfortunately, with the possibility of corporate and quasi-sovereign defaults still on the cards, governments across the region will likely see their balance sheets deteriorate dramatically in the coming months, as the private sector’s external liabilities are transferred to the sovereign. Thus, while I have yet to call the ‘D’ word for any country in Emerging Europe just yet, I’m going to be watching the situation very closely. Indeed, should we see a sudden surge in public sector liabilities in Q4 2008, this might force a revision to my core views.