Will Greece Follow Ukraine's Gamble?

May 26, 2015 1:45 PM

After months of patient negotiations with its creditors, the Ukrainian government decided to gamble on May 19—by passing a motion through parliament to impose a moratorium on paying international bondholders. This calculated measure was taken after talks with creditors bogged down earlier in May. The stakes are high: The government needs to strike a deal with bondholders before June 15 or risk not receiving the next tranche of the $17.5 billion loan from the International Monetary Fund (IMF), plus some bilateral aid attached to it. This money is sorely needed as the economy is projected to decline between 5 percent and 8 percent this year, which will only increase the social tensions already apparent following recent government increases on energy prices.

What a difference a month makes. In April I met Ukrainian Finance Minister Natalie Jaresko on two occasions, and both times she seemed confident a deal is within reach. Her main point is that current debt levels are unsustainable and any deal with Ukraine's international commercial creditors must include maturity extensions, coupon reductions, and principal reductions. Ukraine's bonds now trade at 45 cents on the dollar, and Ukraine's biggest creditor Franklin Templeton, which along with three other companies owns $8.9 billion of the nation's debt, refuses to negotiate.

The government's logic on the moratorium is simple: It has the right to spend taxpayer money on public services and not on repaying loans that were taken out by previous corrupt regimes. One can hardly disagree with this sentiment.

The current Greek government has frequently made the same argument. In an earlier blog post I wrote about Greek Finance Minister Varoufakis's comments on May 19 in Athens. He argued that the model of the IMF and EU rescue packages predicated on reaching certain public debt targets is flawed, and a new model for euro area member assistance is needed. The Syriza government is not prepared to pay off all debts accumulated by previous corrupt governments in Greece.

So far, Minister Varoufakis is alone in making such statements. That is, if one discounts comments by Hungary's Prime Minister Victor Orban when he was attacking the IMF-EU rescue package for Hungary in 2010, at the onset of his second term in power. Now he has company, and one question is whether Greece can use the increasing popularity of its logic to pressure its creditors.

The answer is no, as there are considerable differences between the Greek and Ukrainian situations. First, by now much of the Greek debt is in the hands of the European Central Bank (ECB), and its president Mario Draghi is unlikely to be moved by such logic. Second, Greece already renegotiated the terms of its rescue package in 2012, when it became clear that the first IMF-EU program was failing. There is now little additional room to maneuver. And finally, too much precious time has already been lost in the standoff between Minister Varoufakis and his colleagues in the euro area.

The one takeaway for Greece from the current debt situation in Ukraine is that the IMF, the ECB, and the European Union—or the Institutions, as they are called in Athens—are not quick to help their partners. And if Ukraine feels abandoned, Greece has all the more right to feel so.