EBRD: UKRAINE NEEDS $20 BILLION IMF PACKAGE "TO

C O N F I D E N T I A L KYIV 002139

SIPDIS

DEPT FOR EUR, EUR/UMB, EEB/OMA
TREASURY FOR TTORGERSON

E.O. 12958: DECL: 10/24/2018
TAGS: EFIN PGOV PREL ECON ETRD XH UP
SUBJECT: EBRD: UKRAINE NEEDS $20 BILLION IMF PACKAGE "TO
SHOCK MARKETS" BACK TO LIFE

REF: A. KYIV 2030 AND PREVIOUS

B. KYIV 2138

Classified By: AMBASSADOR WILLIAM B. TAYLOR, REASONS 1.4(B) AND (D)

1.(C) Summary. EBRD Senior Advisor Piroska Nagy told the
Ambassador on October 24 that the IMF's support package for
Ukraine will likely top $20 billion. Such a sum was
necessary to reestablish confidence in Ukraine because
current rumors of the package's size -- anywhere between $3
and $15 billion -- were already priced into political and
market expectations and not sufficient to "shock the markets"
back to life. Until recently an economist at the IMF, Nagy
said the leadership of the current IMF delegation in Kyiv was
competent yet inexperienced in negotiating deals of this
magnitude. She also criticized the IMF for failing to reach
out to foreign banks to cajole them to support their
Ukrainian subsidiaries. Nagy asked for Embassy support of an
EBRD-backed bid for hobbled Prominvest Bank, perhaps in
concert with another "reputable" private-sector bank, despite
what she characterized as World Bank support for the
nationalization of Prominvest's assets. End Summary.

2.(C) On October 24, EBRD representatives Nagy and Alexander
Pivovarsky provided the Ambassador with a readout on the
fluid negotiations between Ukraine and the IMF. Based on her
conversations with IMF officials, Nagy emphasized that a
unified Ukrainian government commitment was an extremely
important precondition for any agreement. (Note: As of
October 24, the Verkhovna Rada has still not agreed on any of
the three anti-crisis legislative packages proposed by
President Yushchenko, PM Timoshenko, and opposition Party of
Regions leader Viktor Yanukovich (Ref B)). Nagy said that
both the GOU and the market were now expecting a package
worth about $15 billion. In her view, this figure is already
entrenched in both political and economic expectations and
may now not be enough to unfreeze markets and reestablish
confidence in Ukraine quickly. She added that politicians
may not yet understand the severity of the situation and, in
her view, the stakes for Ukraine's politicians "messing up"
their country needed to be bigger. Only when politicians
felt they had something to lose could the current impasse and
general lack of policy coordination be overcome. She called
the IMF,s pegging packages to country-specific quotas as
"old stuff" that no longer had resonance in the global
financial crisis. Nagy indicated that the package would very
likely exceed $20 billion, a figure she believed was
necessary to "shock the markets" beyond current expectations
and get credit flowing again.

3.(C) Nagy said that IMF representatives needed to talk to
foreign banks, mostly located in Western Europe, that had a
presence in Ukraine in order to coordinate programs for
ensuring the solvency of key Ukraine subsidiaries. She
surmised that no one had yet "picked up the phone" to speak
with Western banking leaders, despite the fact that, in her
opinion, this should be the IMF's role in a crisis setting.
Until recently a senior economist at the IMF, Nagy expressed
doubt about the IMF delegation's capacity to steer through
some of the difficult policy considerations, especially in
light of the global financial crisis, and she described chief
IMF envoy Ceyla Pazarbasioglu as technically sound,
especially in financial sector matters, but inexperienced in
negotiating financial packages. She worried that, because
the IMF had not recently overseen financial assistance
packages in Europe, its "know-how is still developing" while
important decisions are being made rapidly in the field.
Nagy concluded that the IMF should be in especially close
contact with U.S. and European embassies, and she pledged to
facilitate a meeting between Ambassador Taylor and
Pazarbasioglu. (Note: the meeting has been scheduled for
October 25. End note).


4. (C) Nagy described Ukraine's banking crisis as a
combination of poor access to capital markets and a
consequence of reckless expansion and risky loans. She said
that the World Bank is taking the lead among Ukraine-based
international financial institutions in categorizing the
solvency and liquidity of individual banks. But she
expressed concern that World Bank representatives had been
advising government officials to nationalize troubled
financial institutions, such as Prominvest Bank. In her
opinion, any increase in state-controlled banks, especially
in light of the lack of technical expertise at the National
Bank to resuscitate failed banks, would be a worrying

development. She added that privatization talks between the
National Bank and potential investors were lacking
transparency.


5. (C) Nagy asked the Ambassador for embassy support in
EBRD's effort to reach out to reputable banks and put
together a privatization offer for Prominvest Bank. She felt
that a transparent privatization program for Prominvest would
send a necessary signal to investors, as well as set a
precedent for other bank bailouts that may be in Ukraine's
immediate future. The Ambassador offered to put them in
touch with key Western bankers in Kyiv.
TAYLOR