What Greece Could Tell Us About Ukraine

As tensions escalate in the eastern part of Ukraine, the country's officials are in Washington looking to put the finishing touches on an agreement with the International Monetary Fund that provides immediate financial relief and opens the doors to help from others. Given the situation on the ground, these already-complex negotiations must find a way to balance economic, political, security and social considerations. Also, the parties need to come up with a lot of money to cover the country’s financing requirements.

In thinking about these tough challenges, I found myself wondering whether they could have any connection to last week’s successful bond issuance by Greece. If not yet, they possibly will down the road.

Let’s start with the easier part of the equation -- the news of Greece's triumphant return to international capital markets.

Last week, the Greek government easily raised some $4 billion of new bond financing in its first placement on global capital markets since 2010. Unexpectedly large investor demand allowed Greece both to increase the size of its five-year bond offering and to issue it at an interest rate of just under 5 percent. This is remarkable for a country that imposed significant losses on investors only two years ago and has yet to deal decisively with its debt overhang, let alone put its economy back on the path of sustainable growth and prosperity.

Three main factors have enabled Greece to overcome doubts about its willingness and ability to service its debt in a timely manner: determined efforts to get its domestic financial house in order, steadfast financial support from its European neighbors and the European Central Bank, and investors' hunger for yield at a time when major central banks have been making extraordinary efforts to keep interest rates low.

Greece’s quick return to international capital markets stands in sharp contrast to the experience of Latin American countries in the 1980s, Russia after its 1998 debt restructuring, and Argentina after its 2001 default. It reflects a change in investors’ willingness to forgive and forget in today’s more globalized financial markets, especially when the offending sovereign has strong backing from the official sector.

Why, then, isn't debt restructuring part of the package being put together for Ukraine, given the country’s enormous need for external funding to stabilize its finances and support reforms crucial to longer-term growth?

Admittedly, Ukraine’s debt burden is nowhere near that of Greece, and its maturity profile is not that bad. Also, the immediate disruptions from a restructuring could be large. Yet, aside from the challenge the international community faces in raising enough cash to cover Ukraine's ever-increasing, multiyear financing gap, there is no easy way to lock in existing creditors. As a result, the West faces the prospect of seeing some of its money transferred directly to others, as Ukraine uses the proceeds of new loans to pay off maturing debts.

In large part, the inclination to avoid a Ukrainian debt restructuring reflects concerns that the country could also end up locked out of international capital markets for many years. Ukraine is not a member of the euro area and does not enjoy the funding support that comes with such membership, including access to the European Central Bank’s balance sheet, so it might have a hard time returning to markets if it were shut out temporarily.

The alternative of covering Ukraine's financing gap through new loans, however, will not necessarily be any easier or ultimately more palatable. Stabilizing and reforming Ukraine's economy poses a challenge as big, or bigger, than what Greece faced in 2010. Given Ukraine's strategic importance, the West will be involved for quite a while. There will probably be some limit to the West’s willingness to pump in fresh cash only to see some of it go straight back out again to Russia, banks and other private creditors. Even if Western governments wished to turn a blind eye, doing so would become very tricky if Moscow were to maintain its aggressive posture toward Kiev.

All of this suggests that the durability of the "no debt restructuring" approach is far from guaranteed. At some point down the road, Russia and other creditors may be asked to share in the burden of durably fixing Ukraine's finances -- particularly now that international bond markets have lessened the threat of a prolonged cutoff by so eagerly embracing Greece.

Mohamed El-Erian is the chief economic adviser at Allianz SE. He’s chairman of Barack Obama's Global Development Council and the author of best-seller When Markets Collide.

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