Ukraine’s cash-strapped government failed to reach agreement on Wednesday with a visiting IMF mission on a $15bn bailout, according to local officials. Having realised that a deal was unlikely, Kiev moved on Tuesday to patch up short-term financing needs. Ukraine raised $1.25bn through a fresh 10-year eurobond at 7.5 per cent on Tuesday, helped by international investors’ hunt for yield.

And so, Kiev has bought itself more time, though at borrowing rates much more expensive than the IMF has offered. It’s a strategy Ukraine has stuck to in recent years, but one that may not be possible if market confidence shrinks and the country’s economy continues to deteriorate.

After completing negotiations during the March 27 – April 10 visit to Kiev, the Fund issued this statement (with our emphasis):

The mission held productive discussions with the Ukrainian authorities on economic policies that could be supported by a Stand-By Arrangement with the IMF. The key building blocks of a new program would be measures to reduce Ukraine’s fiscal and external current account deficits, and energy sector and banking reforms, in order to create the conditions for sustained economic growth and job creation in Ukraine. The mission made good progress in discussing these issues, and our dialogue will continue in the coming weeks.

The statement still leaves open the chance that a deal could be done in the near future. The big question remains: Is Ukraine ready to meet IMF conditions?

Much depends upon Kiev’s willingness to adopt the toughest of IMF conditions: reducing its deficit by removing unsustainable, across-the-board household natural gas price subsidies. Another big factor is whether Ukraine’s economy, which slipped into recession late last year, can stage a recovery.

Kiev-based investment bank Dragon Capital said:

Yesterday’s Eurobond sale increased the government’s YTD F/X borrowings to $4.7bn. This amount covers 44% of this year’s public sector F/X debt service needs and almost two-thirds of the government’s own F/X needs (i.e. excluding NBU redemptions to the IMF). The government’s sizable F/X borrowings along with domestic F/X market stabilization and increased political turbulence have apparently reduced the authorities’ willingness to compromise with the Fund … increasing the probability of the muddle through scenario. We keep our central IMF-based scenario intact at this stage, as Ukraine’s macro fundamentals remain weak and the window of opportunity for unpopular reforms is still open, but may revise our base-case view in the next several months.

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