6 May 2014, 15:40

S&P: A split Ukraine will default

S&P: A split Ukraine will default

The breakaway regions of Donetsk and Lugansk are very important for Ukrainian economy. For the US-sponsored junta it is imperative to keep the two regions under control at all costs because without them Ukraine will soon be bankrupt. Standard and Poor's researchers explain why.

Donetsk and Lugansk produce more than a third of the country's GDP and a more than 40% of the country's exports. All previous governments used those two regions as cash-cows, keeping them artificially poor. Taxes gained from the two rebellious regions were used to buy the votes and create state-sponsored jobs in the western regions of the country. To a certain extent, the civil war in Ukraine is also a war between people who produce added value and those who are used to live from the governmental handouts. One of the main demands of federalists in the eastern regions is fiscal independence, because citizens of Donetsk and Lugansk want to keep the taxes paid by local companies in the regional economy and not send them to Kiev. In this context, Ukraine's federalization movement resembles movements in some rich Spanish and Italian regions that fight for fiscal independence and against unjust repartition of budgetary funds.

According to John Chambers, chairman of the Standard & Poor's Sovereign Ratings Committee, “if Ukraine loses some of its territorial integrity, it will not likely be able to repay the loans”. He also told Reuters that "Ukraine came into the crisis with a moderate government debt burden at the existing exchange rate. But obviously, if the exchange rate collapses and they lose additional parts of their territory, their ability to service their debt will be jeopardized." Given the already dire state of the country's economy and its junk credit rating of CCC, which is one notch above a default rating, it is safe to assume that losing Donetsk or Lugansk will push Ukraine into bankruptcy. However, even if Ukraine's illegitimate government manages to regain control of those territories, Ukraine is still likely to default because the IMF bailout package covers only half of the 35 billion dollars required to cover the budgetary deficit and external payments for 2014.

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