STOCK MARKET WATCH -- Friday, 12 September 2014

[Demeter]

14. Michael Hudson: Losing Credibility – The IMF’s New Cold War Loan to Ukraine

http://www.nakedcapitalism.com/2014/09/michael-hudson-losing-credibility-imfs-new-cold-war-loan-ukraine.html?utm_source=feedburner&utm_medium=email&utm_campaign=Feed%3A+NakedCapitalism+%28naked+capitalism%29

By Michael Hudson, a research professor of Economics at University of Missouri, Kansas City, and a research associate at the Levy Economics Institute of Bard College, who publishes regularly at his website. His latest book is “The Bubble and Beyond”

In April 2014, fresh from riots against the kleptocrats in Maidan Square and the February 22 coup, and less than a month before the May 2 massacre in Odessa, the IMF approved a $17 billion loan program to Ukraine’s junta. Normal IMF practice is to lend only up to twice a country’s quota in one year. This was eight times as high.

Four months later, on August 29, just as Kiev began losing its attempt at ethnic cleansing against the eastern Donbas region, the IMF signed off on the first loan ever to a side engaged in a civil war, not to mention being rife with insider capital flight and a collapsing balance of payments. Based on fictitiously trouble-free projections of the ability to pay, the loan supported Ukraine’s currency, the hryvnia, long enough to enable the oligarchs’ banks to move the money quickly into Western hard-currency accounts before the hryvnia plunged further and was worth even fewer euros and dollars.

This loan demonstrates the degree to which the IMF is an arm of U.S. Cold War politics. The loan terms imposed the usual budget austerity, as if this would stabilize the war-torn country’s finances. The financings obviously were devoted mainly to rebuilding the army. The war-torn East can expect to receive nothing even nothing even though its basic infrastructure has been destroyed for power generation, water, and hospitals. Civilian housing areas that bore the brunt of the attack are also unlikely to profit from the IMF’s uncharacteristic generosity.

A quarter of Ukraine’s exports normally are from eastern provinces and sold mainly to Russia. But Kiev has been bombing Donbas industry and left its coal mines without electricity. Nearly a million civilians are reported to have fled to Russia. Yet the IMF release announced: “The IMF praised the government’s commitment to economic reforms despite the ongoing conflict.” No wonder there was almost no comment in the news or even the business press!...The IMF’s Articles of Agreement forbid it to make loans to countries that clearly cannot pay, prompting its economists to complain at their Washington meeting that their institution was violating its rules by making bad loans “to states unable to repay their debts.” One official called its Debt Sustainability Analysis, “‘a joke,’.... In practice the IMF simply advanced however much a country needed to pay its bankers and bondholders, pretending that more austerity would enhance the ability to pay, not worsen the debt trap, while Kiev also used the loan for military expenses to attack the Eastern provinces...Ukraine’s main problem is that its debt is denominated in dollars and euros. There seems only one way for Ukraine to raise the foreign exchange to repay the IMF and NATO creditors rounded up to help Westernize the economy: by selling its natural resources, headed by gas rights and agricultural land...

AND IT GOES ON....THIS IS A HORRIFYING, REAL-TIME ECONOMIC HIT. SHOCK AND AWE, INDEED.