Kiev’s new government, for all of its aggressively pro-market rhetoric and its constant invocation of “reform,” appears to not entirely understand the way that markets actually work. Not to wax overly philosophical, but markets are wonderfully efficient at allocating scarce resources and at balancing risks and rewards. They’re not terribly effective at passing moral judgements on who is “good” or “bad.”
Bond markets, for example, present investors with extremely stark tradeoffs between security and profit: investors can get substantial returns, but in order to do so they need to expose themselves to much greater risks. It would be great if investments as safe and liquid as US Treasuries yielded 8 or 9 percent a year, but they don’t. And that’s the whole point: in order to get yields of that magnitude, you need to swim in much murkier waters, investing in countries whose abilities to repay their debts on time is much less certain.
When investors are evaluating whether or not to buy a particular country’s bonds, the only thing they care about is if the country is going to be able to make the requisite payments. Politics enters into the equation not in any kind of comparative analysis of “values,” but in an analysis of stability (i.e. “will this country’s government get overthrown before the last payment is due”). A stable autocratic government is, from the market’s perspective, greatly preferable to an unstable democratic one. And vice versa. The merits of democracy or authoritarianism are entirely beside the point, and what matters first and last is the ability to pay.
That might seem exceedingly obvious, but as basic an overview of the bond market as that is, it appears to be substantially beyond the expertise of Ukraine’s current Prime Minister, Arseny Yatsenyuk.
Yatsenyuk has, for reasons I can’t even begin to grasp, made a large number of public statements about how “unfair” it is for the country to be saddled with the debts of the old regime. In recent comments, Yatsenyuk said the following:
“Private creditors need to realize they need to contribute and support the Ukrainian people…the government will do everything in order to lift this huge debt burden that was made under the Yanukovych regime… [Investors] were all aware they can easily go into arrears as they financed an entirely kleptocratic pro-Russian president”
In an interview with CNBC, Yatsenyuk struck a broadly similar note, encouraging investors to understand that a haircut on bond payments was “their contribution to the Ukrainian people” while also whining that “the former regime of Yanukovych collected $40 billion and we succeeded in collecting only $25 billion.”
The reason why “the former regime of Yanukovych” was able to raise more money than the current one was because investors had greater faith in the ability of that government to service its debt obligations. And, on the merits, that seems like the right decision: Ukraine is currently an economic disaster area, and it is already on the brink of technical default. Why on earth would an investor have any faith whatsoever that such a government could pay its debts?
Not to strike too bloodless a tone, but investors do not have an interest in “contributing to the Ukrainian people.” That’s not what a bond investor is doing! If someone wants to donate money to help the Ukrainian people (a perfectly worthy endeavor!) they should not go out and purchase Ukrainian government debt. Instead they should donate to a charity, an NGO, or a non-profit. Heck, they could even cut the Ukrainian government a check if they felt like it.
But investors are not running a charity. They are trying to make money. As such, they have been predictably unmoved by the Ukrainian government’s paeans to “European values” and “democratic choice.” Those aren’t on their list of concerns.
You don’t have to revel in any of this. I suppose that it would actually be pretty nice if the international capital markets punished “bad” countries while rewarding “good” ones. But that doesn’t happen! Even today, Russia pays less to borrow money than the country that its troops have invaded.
Now, in comparison to several years ago, investors have actually soured quite dramatically on Putin’s Russia. But they have done so not because they have come to a belated realization about the nature of the Kremlin’s political values but because they have lost faith in the country’s ability to pay back what it owes.
I wish the Ukrainian government nothing but luck in its struggle to move closer to Europe, but they need to be aware that they are not going to get “credit” for this from the financial world. The sooner they realize this, the better off they’ll be.