Ukraine vs. Argentina, which country is more likely to default?

by on February 23, 2014 at 12:14 am in Current Affairs, Data Source, Economics | Permalink

From a loyal MR reader, with some editing by me:

Ukraine default risk is way up, but Ukraine has barely closed the gap with Venezuela in the default probability race and Argentina, with its pari-passu case now under review for cert at the Supreme Court, is still way ahead with its CDS-implied likelihood of default. I know its hard to look at pictures of Kiev and think “that looks like a safe sovereign credit,” but even with the recent run-up Ukraine still has a market-implied default hazard at only about 60% of the level of Argentina.

http://www.dbresearch.com/servlet/reweb2.ReWEB?rwnode=DBR_INTERNET_EN-PROD$NAVIGATION&rwsite=DBR_INTERNET_EN-PROD&rwobj=cdscalc2.Start.class&cdsAction=showPic&cdsCountry=CDSC0000000000000421,CDSC0000000000000010,CDSC0000000000000009&cdsRecRate=20

Those are some graphs at the link from the CDS-implied default probabilities page from Deutsche Bank.

http://www.dbresearch.com/servlet/reweb2.ReWEB?rwnode=DBR_INTERNET_EN-PROD$CIB_LINKS&rwobj=CDS.calias&rwsite=DBR_INTERNET_EN-PROD

Part of the run-up in the Ukraine and Venezuela insurance prices is due to Argentina’s repeated losses in their pari-passu case. Should they be denied cert or lose at the Supreme Court, other nations with pari-passu clauses will find it both difficult to restructure and harder to selectively default.  That is driving up CDS rates across the risky sovereign space, mostly because of lower recovery in CDS settlement auctions.  On related issues with pari passu see this law and econ paper.

The difference between Ukraine and Argentina probably says something about the importance of willingness to pay versus ability to pay and willingness to pay is what really matters.

prior_approval February 23, 2014 at 12:48 am

And does the West care if the Ukraine defaults its Russian gas bill, or a few oligarchs take an energy related haircut?

‘At the traditional core of Ukrainian corruption is the natural gas trade with Russia. Simply put, powerful Ukrainians and Russians skim billions of dollars a year through opaque financial arrangements between the two countries (this description of how the system works, from 2008, remains the best). And it doesn’t seem to matter who’s in power; it has gone on this way for almost two decades, with different powerful clans profiting, depending on who is president.

“The story of Ukrainian power is rent-seeking off of energy deals with Russia,” the Atlantic Council’s Damon Wilson told Quartz. Wilson, former senior director for Europe at the US National Security Council, said that one of the main current beneficiaries of this system is Yanukovych, who along with his family has become wealthy through the natural gas trade. Any deal with Europe would force him to sacrifice this income stream, Wilson said.’ http://qz.com/179377/ukraines-19-billion-question-of-debt-and-corruption/

And the Russians do want the money, as this report from Feb. 3 2014 demonstrates – ‘MOSCOW, February 3 (RIA Novosti) – Crisis-hit Ukraine currently owes Russia about $3.3 billion in unpaid natural gas bills, Russia’s state-owned gas monopoly Gazprom said Monday in an apparent reminder that the long-running conflict over the fuel has not been solved by a recent price cut agreement.

Ukraine is unlikely to pay on time for gas imported in January, Vedomosti cited President Vladimir Putin’s spokesman as saying in a Monday report about Ukraine falling behind with repayments.

Russia agreed to slash the gas price for Ukraine in a December bailout that was widely seen as a political reward for Ukrainian President Viktor Yanukovych after he backed away from integration agreements with the EU to instead cement closer ties with Russia.

Gazprom chief executive Alexei Miller met Ukrainian Deputy Prime Minister Yuriy Boyko in Moscow to discuss the debt issue Monday, according to a Gazprom statement.

Russia supplied Ukraine with $2.63 billion worth of gas in 2013, Gazprom said.’ http://en.ria.ru/russia/20140203/187164045/Ukraines-Gas-Debt-to-Russia-Rising–Report.html

Anyone want to venture a guess whether Gazprom is a ‘sovereign’?

Peter Schaeffer February 23, 2014 at 10:20 am

According to Fred, Argentina’s gross debt is 48% of GDP (2012) vs. Ukraine at 27% of GDP (2011).

An important note is that Ukraine’s real GDP per-capita in constant dollars (PPP basis) more than doubled from a low in 1997 ($3,388) to a peak in 2008 ($7,418). It has since fallen to $7,044 (2010) but remains well above the first data point ($5,290 in 1993). Note that real GDP in constant national currency, is still well below the 1990 level. Fred indicates that international debt issues to Ukraine are 11% of GDP (2011) and outstanding international public debt is only 6.35% of GDP (2011).

Basically, every data series in Fred shows a boom in Ukraine’s economy after the late 1990s. Of course, the boom was really just a recovery from the terrible crash associated with the end of communism.

The Fred data for Argentina is also very positive with a long boom starting after the crash of 2001/2. The crash of 2001/2 was devastating (as deep as the Great Depression in the United States, but much shorter) but was followed by very strong growth (driven by currency devaluation and a global commodity boom). Of course, Argentina never suffered the crash in output post-1990, from the end of communism. The last per-capita GDP data point for Argentina is the highest in Argentina’s history ($12,337 for 2010). Argentina is not deeply in debt (internationally) with foreign debt at quite low levels.

Basically, there is no reason for either country to default. My guess is that Argentina is more likely to actually default but only because much of the debt left over from the last default is remains disputed.

Yancey Ward February 23, 2014 at 10:51 am

What is the difference between probability 1 and probability 1?

Yancey Ward February 23, 2014 at 10:51 am

Or put another way, shouldn’t the title be “Who is most likely to default first”?

mm February 23, 2014 at 11:19 am

Ukraine at least has the chance for decent leadership, albeit small, b/c its people take to the streets to get rid of crony/kleptocrats- in Argentina they vote them in. Additionally, who in their right mind will invest in Argentina after the YPF fiasco-sell it, take the money, then steal it back.

GC February 27, 2014 at 4:52 am

Ah, Ah . Ah.. “Ukraine at least has the chance for decent leadership”. AH! You really should look up who the revolutionary leaders are, possibly not on any American media. Decent leadership, that’s a good one.

Just another MR Commentor February 24, 2014 at 4:23 am

Comparing IQ differences between the countries should tell you everything you need to know. Of course both nations are WELL on the leftside of the curve so I wouldn’t expect much good news from either.

John Smith February 24, 2014 at 8:08 am

If you lend money to Argentina, you deserve it.

In economic terms, the risk premium on the bonds is supposed to compensate you for the near certainty of default. You pretty much know Argentina will eventually default. You just hope it isn’t before your high paying bonds have matured or you sold them.

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BEIJING, Feb. 21 (Xinhua) — A Beijing-based Tibetology scholar has criticized the Dalai Lama’s Friday meeting with U.S. President Barack Obama in the White House, saying it was another “anti-China farce.” “Once again, the Dalai Lama slipped into the White House Map Room for a so-called ‘unofficial meeting’ with Obama. This was another farce against China,” said Lian Xiangmin, a researcher with the China Tibetology Research Center, in a signed article.

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