What would be the impact on Europe should Ukraine go bust?

Ask the expert with Professor Stefan Hedlund

How would a sovereign default in Ukraine impact on austerity-hit Europe?

Professor Stefan Hedlund:

Sovereign default is a very big deal, and it may be avoided perhaps by a restructuring where creditors will have to take what is known in the market as a ‘haircut’.

But either way it goes, its big money we’re talking about.

The IMF now says the financing gap by the immediate need is US$15 billion. And that’s an estimate. And it will be the taxpayers in the end that will have to come up with this money to bail out Ukraine.

So if there is a default it means we won’t get our credits back. And if there is a restructure we will have a settlement that pushes the issue to the future. But either way its a lot of money.

If you can imagine what that will do to the government in Greece, that feels it should get some money, and generally to the countries in the south of Europe that don’t feel the big need to help Ukraine. So its not only a financial issue with money this big, its going to be a big political problem for the EU as well, either way.

Is it not in Russian President Vladimir Putin’s interest to prevent sovereign default in Ukraine?

Professor Stefan Hedlund:

Well, one might think so. But Mr Putin is trying to play both sides here. He wants to push Ukraine as close as possible to the edge, though I do not think he would like to see a default as that means Ukraine would owe money to Russia as well. The contracts they have for pre-payment on gas deliveries would then go down the drain as well.

My guess is that Putin is trying to push Ukraine as close to the edge as possible, hoping that the EU taxpayers will then step in and provide money that will then go into the Russian coffers. That seems to be his game.

Obviously games don’t always go the way you plan, but I think it’s going to go pretty much the way that Mr Putin wants.

Is Putin hoping to exploit this situation to sow discord within the European Union?

Professor Stefan Hedlund:

Mr Putin is playing a winning game here in two senses. One is that his ambition was never to occupy Ukraine militarily. His ambition was to demonstrate to the Ukrainians and the world that Ukraine is not a workable state, that it needs to have a deal with Russia if it is going to survive.

And that point has now been proven.

The other game he has been playing is ‘divide and conquer’ within the European Union, and that game is winning as well with propaganda television being set up in German language and with fissures opening up between various EU member states, the Kremlin is going to play very hard into those fissures - making sure that European Union also ends up in political crisis, where it is not capable of making decisions, perhaps even on its own austerity programmes.

The Kremlin is financing right-wing political parties within the European Union that then vote against sanctions against Russia.

So, Mr Putin is playing different games here, but they all point in the same direction – to prove that Ukraine cannot survive without Russia, and to prove that the EU is not a credible actor in this game.

Can sovereign default in Ukraine be prevented?

Professor Stefan Hedlund:

It could have been prevented a few months ago if Ukraine has made a serious effort to get its own house in order. The IMF has been very specific on what type of reforms need to be carried out, and there has not been a lot of things happening in Kiev.

So, you can make all kinds of excuses why the Ukrainian government has had many things to think about, and there is a lot of sympathy for Kiev. But that doesn’t remove the fact that the Ukrainian economy is not structurally sound enough to be able to make it on its own. And that is something that the EU and IMF should have known months ago.

And waking up at five-to-midnight is not to the credit of the analysts within the IMF and EU. They should have seen this coming. And the fact that they didn't now means there is panic, and panic is never helpful when you’re dealing with a big crisis.

(Photo credit: dpa)