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<DIV> </DIV>
<DIV style="FONT: 10pt arial">----- Original Message -----
<DIV style="BACKGROUND: #e4e4e4; font-color: black"><B>From:</B> <A
title=rasmus@kyklos.com href="mailto:rasmus@kyklos.com">jack rasmus</A> </DIV>
<DIV><B>To:</B> <A title=drjackrasmus@gmail.com
href="mailto:drjackrasmus@gmail.com">drjackrasmus@gmail.com</A> </DIV>
<DIV><B>Sent:</B> Friday, March 28, 2014 4:31 PM</DIV>
<DIV><B>Subject:</B> Ukraine's IMF Deal Means Greece-Like Depression' by Dr.
Jack Rasmus</DIV></DIV>
<DIV><BR></DIV>
<DIV class=WordSection1>
<P style="LINE-HEIGHT: normal; MARGIN-BOTTOM: 0pt" class=MsoNormal><SPAN
style="FONT-FAMILY: 'Times New Roman','serif'; FONT-SIZE: 14pt"><o:p> </o:p></SPAN></P>
<P style="LINE-HEIGHT: normal; MARGIN-BOTTOM: 0pt" class=MsoNormal><IMG
id=Picture_x0020_1 alt=http://www.counterpunch.org/images/header.jpg
src="cid:FC62B52E09944A91BFA2EB5613337505@johnson8547dac" width=780
height=183><SPAN
style="FONT-FAMILY: 'Times New Roman','serif'; FONT-SIZE: 14pt"><o:p></o:p></SPAN></P>
<P style="LINE-HEIGHT: normal; MARGIN-BOTTOM: 0pt" class=MsoNormal><SPAN
style="FONT-FAMILY: 'Times New Roman','serif'; FONT-SIZE: 14pt">Weekend Edition
March 28-30, 2014 <o:p></o:p></SPAN></P>
<P style="LINE-HEIGHT: normal; MARGIN-BOTTOM: 0pt" class=MsoNormal><SPAN
style="FONT-FAMILY: 'Times New Roman','serif'; FONT-SIZE: 10pt"><o:p> </o:p></SPAN></P>
<P style="LINE-HEIGHT: normal; MARGIN-BOTTOM: 0pt" class=MsoNormal><B><SPAN
style="FONT-FAMILY: 'Times New Roman','serif'; FONT-SIZE: 22pt">Heading Toward a
Greece-like Depression?<o:p></o:p></SPAN></B></P>
<P
style="LINE-HEIGHT: normal; mso-margin-top-alt: auto; mso-margin-bottom-alt: auto"
class=MsoNormal><B><SPAN
style="FONT-FAMILY: 'Times New Roman','serif'; FONT-SIZE: 36pt">Ukraine’s IMF
Deal<o:p></o:p></SPAN></B></P>
<P style="LINE-HEIGHT: normal; MARGIN-BOTTOM: 0pt" class=MsoNormal><SPAN
style="FONT-FAMILY: 'Times New Roman','serif'; FONT-SIZE: 10pt">by
</SPAN><B><SPAN
style="FONT-FAMILY: 'Times New Roman','serif'; FONT-SIZE: 14pt">JACK
RASMUS</SPAN></B><SPAN
style="FONT-FAMILY: 'Times New Roman','serif'; FONT-SIZE: 10pt"><o:p></o:p></SPAN></P>
<P
style="LINE-HEIGHT: normal; mso-margin-top-alt: auto; mso-margin-bottom-alt: auto"
class=MsoNormal><SPAN
style="FONT-FAMILY: 'Times New Roman','serif'; FONT-SIZE: 12pt">On March 27,
2014, the IMF released the broad outlines of its terms and conditions for loans
and other measures for the Ukrainian economy. What those terms and conditions
mean is less a rescue of the Ukrainian economy than the onset of a Greece-like
economic depression for the Ukrainian populace.<o:p></o:p></SPAN></P>
<P
style="LINE-HEIGHT: normal; mso-margin-top-alt: auto; mso-margin-bottom-alt: auto"
class=MsoNormal><SPAN
style="FONT-FAMILY: 'Times New Roman','serif'; FONT-SIZE: 12pt">Ukraine’s
economy had clearly entered a recession, its third since 2008, sometime in the
latter half of 2013. Some recent estimates of the likely contraction of
the economy in 2014-15 have ranged from 5%-15% in GDP
decline.<o:p></o:p></SPAN></P>
<P
style="LINE-HEIGHT: normal; mso-margin-top-alt: auto; mso-margin-bottom-alt: auto"
class=MsoNormal><SPAN
style="FONT-FAMILY: 'Times New Roman','serif'; FONT-SIZE: 12pt">The ‘IMF Standby
Agreement with Ukraine’ text released March 27, acknowledges the current severe
economic instability of the Ukrainian economy. What it fails to acknowledge,
however, is how the IMF package will further adversely impact that
economy.<o:p></o:p></SPAN></P>
<P
style="LINE-HEIGHT: normal; mso-margin-top-alt: auto; mso-margin-bottom-alt: auto"
class=MsoNormal><SPAN
style="FONT-FAMILY: 'Times New Roman','serif'; FONT-SIZE: 12pt">The IMF deal
calls for $14-$18 billion in IMF financial support provided over the next two
years, 2014-15. Another potential $9 billion reportedly will come from other
countries, although in yet unspecified form. The European Bank for
Reconstruction & Development apparently will provide $2 billion of that $9
billion. Presumably the US aid package of around $1-$2 billion now currently
working its way through the US Congress represents another element of the $9
billion. The remaining $5 of the $9 billion non-IMF funding is yet
unidentified.<o:p></o:p></SPAN></P>
<P
style="LINE-HEIGHT: normal; mso-margin-top-alt: auto; mso-margin-bottom-alt: auto"
class=MsoNormal><SPAN
style="FONT-FAMILY: 'Times New Roman','serif'; FONT-SIZE: 12pt">The $27 billion
total is well in excess of the $15 billion that was being talked about in prior
weeks by the public press and more than the $20 billion Ukraine had asked the
IMF for at the end of 2013—an indication that the economy has been deteriorating
more rapidly than reported since the beginning of 2014.<o:p></o:p></SPAN></P>
<P
style="LINE-HEIGHT: normal; mso-margin-top-alt: auto; mso-margin-bottom-alt: auto"
class=MsoNormal><SPAN
style="FONT-FAMILY: 'Times New Roman','serif'; FONT-SIZE: 12pt">In previous
articles on the Ukraine economic situation a few weeks ago, this writer
estimated that at least $50 billion would be needed to stabilize the Ukraine’s
economy over the next two years. That figure may even rise by
2015.<o:p></o:p></SPAN></P>
<P
style="LINE-HEIGHT: normal; mso-margin-top-alt: auto; mso-margin-bottom-alt: auto"
class=MsoNormal><SPAN
style="FONT-FAMILY: 'Times New Roman','serif'; FONT-SIZE: 12pt">The IMF
Statement of March 27 addresses what it considers the most important economic
weaknesses of the Ukrainian economy that require immediate and focused
attention. Those weaknesses include the Ukraine’s current trade deficit, its
rapidly declining international currency reserves, its fiscal budget deficit,
and the budget deficit of its state-owned national gas company,
Naftogaz.<o:p></o:p></SPAN></P>
<P
style="LINE-HEIGHT: normal; mso-margin-top-alt: auto; mso-margin-bottom-alt: auto"
class=MsoNormal><SPAN
style="FONT-FAMILY: 'Times New Roman','serif'; FONT-SIZE: 12pt">The IMF
estimates that the Ukraine’s trade deficit (exports minus imports) at around 9%
of GDP ($17 billion a year) is due to Ukraine’s stagnating exports. What the IMF
proposes in order to resolve this is to allow Ukraine’s currency to continue to
‘float more freely’. The Ukraine currency so far in 2014 has already fallen 26%
to the dollar. So the idea is to allow the currency to decline still further. In
theory, that will make Ukrainian exports more competitive and in turn reduce the
trade deficit. The problem is it will also result in a sharp rise in the
cost of imports and therefore inflation for Ukrainian households. The IMF policy
of promoting further currency decline, in other words, will mean even more
domestic inflation, primarily impacting households, and therefore less spending
by households on other goods and services.<o:p></o:p></SPAN></P>
<P
style="LINE-HEIGHT: normal; mso-margin-top-alt: auto; mso-margin-bottom-alt: auto"
class=MsoNormal><SPAN
style="FONT-FAMILY: 'Times New Roman','serif'; FONT-SIZE: 12pt">Allowing the
currency to decline further also suggests that IMF policy is for the Ukrainian
central bank not to intervene aggressively in coming months to prop up the
currency in global markets. That releases more of the IMF funds to service debt
payments to western banks for the current and past loans. As the IMF statement
indicates, “large foreign debt repayments loom in 2014-15.” The amount of debt
payments due is estimated at $6.2 billion. So Ukrainian households will in
part pay for the debt payments to western banks by having to adjust to higher
inflation and reduce their real spending.<o:p></o:p></SPAN></P>
<P
style="LINE-HEIGHT: normal; mso-margin-top-alt: auto; mso-margin-bottom-alt: auto"
class=MsoNormal><SPAN
style="FONT-FAMILY: 'Times New Roman','serif'; FONT-SIZE: 12pt">Given that $6.2
billion of the $27 billion IMF total package will go to servicing debt payments
to the west, it also means that only around potentially $21 billion of the IMF
total bailout remains to stimulate the Ukrainian economy. But the key word here
is ‘potentially’, since much less than the $21 billion will actually go into the
economy—and will be offset by far more ‘taken out’ per the IMF
deal.<o:p></o:p></SPAN></P>
<P
style="LINE-HEIGHT: normal; mso-margin-top-alt: auto; mso-margin-bottom-alt: auto"
class=MsoNormal><SPAN
style="FONT-FAMILY: 'Times New Roman','serif'; FONT-SIZE: 12pt">A $21 billion
net IMF injection is an economic illusion. Here’s why.<o:p></o:p></SPAN></P>
<P
style="LINE-HEIGHT: normal; mso-margin-top-alt: auto; mso-margin-bottom-alt: auto"
class=MsoNormal><SPAN
style="FONT-FAMILY: 'Times New Roman','serif'; FONT-SIZE: 12pt">First, the
Ukraine’s economy will decline as a result of the IMF package because IMF
measures require major changes in Ukraine’s monetary and fiscal policies that
will in net terms slow, not stimulate, the Ukrainian
economy.<o:p></o:p></SPAN></P>
<P
style="LINE-HEIGHT: normal; mso-margin-top-alt: auto; mso-margin-bottom-alt: auto"
class=MsoNormal><SPAN
style="FONT-FAMILY: 'Times New Roman','serif'; FONT-SIZE: 12pt">For example, the
IMF statement calls for monetary policy that targets “domestic price stability
while maintaining a flexible exchange rate”. What that means is that the central
bank, the National Bank of Ukraine (NBU), will be required by the IMF to reduce
the Ukraine’s money supply and thus raise domestic interest rates, as part of
“an inflation targeting framework over the next twelve months to firmly anchor
inflation expectations.” Minus the economic jargon, what that means is
that the NBU and IMF policy raising interest rates will slow the economy in
order to offset expected inflationary pressures from imports that will occur
from a further currency decline. That interest rate hike policy designed
to offset expected import inflation will further slow the real economy. And that
translates into a further loss of jobs as businesses cut back production due to
rising interest costs.<o:p></o:p></SPAN></P>
<P
style="LINE-HEIGHT: normal; mso-margin-top-alt: auto; mso-margin-bottom-alt: auto"
class=MsoNormal><SPAN
style="FONT-FAMILY: 'Times New Roman','serif'; FONT-SIZE: 12pt">But that’s not
the half of it. IMF measures will not only result in rising import inflation,
but will produce even greater inflationary pressures as a result of IMF-dictated
terms related to Ukraine’s natural gas. Estimates are that natural gas
prices will increase by 79% as a result of the IMF-dictated 50% increase in gas
prices. Simultaneously, as gas prices escalate <I>gas subsidies to households
will be totally phased out over the next two years</I>, according to the IMF
deal.<o:p></o:p></SPAN></P>
<P
style="LINE-HEIGHT: normal; mso-margin-top-alt: auto; mso-margin-bottom-alt: auto"
class=MsoNormal><SPAN
style="FONT-FAMILY: 'Times New Roman','serif'; FONT-SIZE: 12pt">It has been
reported that gas subsidies to households are equivalent to 7.5% of Ukraine’s
GDP. So eliminating gas subsidies means a reduction in consumption of $6.5
billion a year, as households will have to reduce other consumption to pay now
for the gas price hikes and the total phase out of gas
subsidies.<o:p></o:p></SPAN></P>
<P
style="LINE-HEIGHT: normal; mso-margin-top-alt: auto; mso-margin-bottom-alt: auto"
class=MsoNormal><SPAN
style="FONT-FAMILY: 'Times New Roman','serif'; FONT-SIZE: 12pt">That phase out
of gas subsidies and 79% increase in gas prices means a $13 billion cut in real
consumption over two years, 2014-15. That $13 billion reduces the remaining $21
billion of the IMF package still further, leaving only $8 billion in potential
net remaining stimulus for the real economy from the IMF deal. However, that’s
still not the entire picture of the IMF deal negative impact on the Ukrainian
economy.<o:p></o:p></SPAN></P>
<P
style="LINE-HEIGHT: normal; mso-margin-top-alt: auto; mso-margin-bottom-alt: auto"
class=MsoNormal><SPAN
style="FONT-FAMILY: 'Times New Roman','serif'; FONT-SIZE: 12pt">The IMF deal
also calls for ‘Fiscal Policy’ reforms, or what it calls the need to “implement
deeper fiscal adjustment” that will “reduce the fiscal deficit to around 2.5% of
GDP by 2016.” That 2.5% budget cut represents another $4.5 billion in
combined annual Ukrainian government spending cuts (and/or tax hikes),
presumably in each of the next two years.<o:p></o:p></SPAN></P>
<P
style="LINE-HEIGHT: normal; mso-margin-top-alt: auto; mso-margin-bottom-alt: auto"
class=MsoNormal><SPAN
style="FONT-FAMILY: 'Times New Roman','serif'; FONT-SIZE: 12pt">The spending
cuts will no doubt come out of government job reductions and wage cuts for
remaining government workers. It will also undoubtedly include deep cuts
to the pension system affecting all retirees, which some estimate will mean cuts
in pensions by up to 50% by 2016. It is possible that the $4.5 to $9 billion in
government deficit reduction over the next 1 to 2 years will mean sales tax
hikes for consumer households as taxes are cut for businesses, since the IMF
statement of March 27 also calls for “measures to facilitate VAT (value added
tax) refunds to businesses”.<o:p></o:p></SPAN></P>
<P
style="LINE-HEIGHT: normal; mso-margin-top-alt: auto; mso-margin-bottom-alt: auto"
class=MsoNormal><SPAN
style="FONT-FAMILY: 'Times New Roman','serif'; FONT-SIZE: 12pt">In its March 27
statement the IMF has not spelled out the required job, wage, and pension cuts
specifically. It is clearly waiting for the Ukrainian interim government
to inflict those economic wounds on itself and the Ukrainian people, following
which the IMF Management and Executive Board will approve the offered
deal.<o:p></o:p></SPAN></P>
<P
style="LINE-HEIGHT: normal; mso-margin-top-alt: auto; mso-margin-bottom-alt: auto"
class=MsoNormal><SPAN
style="FONT-FAMILY: 'Times New Roman','serif'; FONT-SIZE: 12pt">To summarize,
the IMF deal of March 27 calls for paying western banks and lenders $6.5 billion
over the next two years in debt servicing payments. It additionally requires the
reduction of household gas subsidies by another $13 billion plus the total phase
out of gas subsidies. And it indirectly calls for the Ukrainian government to
cut spending by at least $8 billion (2.5% of GDP) over the next two years—in the
form of cuts in government jobs, wage cuts for government workers, and pension
payment reductions of a likely 50% for retirees in
general.<o:p></o:p></SPAN></P>
<P
style="LINE-HEIGHT: normal; mso-margin-top-alt: auto; mso-margin-bottom-alt: auto"
class=MsoNormal><SPAN
style="FONT-FAMILY: 'Times New Roman','serif'; FONT-SIZE: 12pt">Add all that up,
and not surprisingly it’s around $27 billion. That’s $27 billion of economic
spending and stimulus taken out of the Ukrainian real economy per the IMF deal.
In other words, just about the $27 billion that the IMF purportedly will provide
to the GDP per the March 27 announcement. Which means Ukrainian households
will pay for the IMF’s $27 billion package with higher gas prices, elimination
of gas subsidies, government job and wage cuts, and big pension payment
reductions.<o:p></o:p></SPAN></P>
<P
style="LINE-HEIGHT: normal; mso-margin-top-alt: auto; mso-margin-bottom-alt: auto"
class=MsoNormal><SPAN
style="FONT-FAMILY: 'Times New Roman','serif'; FONT-SIZE: 12pt">But $27 billion
is not really an ‘even trade off’. It’s really a net negative stimulus for
Ukraine due to the composition of the IMF deal. Keep in mind, the $6.2 billion
in debt servicing payments outflow to the west will have absolutely no positive
impact on Ukraine’s GDP. So, first of all, it’s really only the IMF net $21
billion ‘’in” vs. the Ukrainian $27 billion taken “out” of the economy per IMF
requirements. But even $21 billion ‘in’ vs. $27 billion ‘out’ is not the
true net estimate.<o:p></o:p></SPAN></P>
<P
style="LINE-HEIGHT: normal; mso-margin-top-alt: auto; mso-margin-bottom-alt: auto"
class=MsoNormal><SPAN
style="FONT-FAMILY: 'Times New Roman','serif'; FONT-SIZE: 12pt">The $27 billion
taken out reflects a household consumer spending ‘multiplier effect’ that is
much larger than the $21 billion net domestic Ukraine injection by the
IMF. If one assumes a conservative 1.5 multiplier effect, the amount taken
out of the Ukrainian economy is more like $40 billion over the next two years—a
massive sum given that the Ukraine’s GDP in 2012 was no more than $175 and was
flat to stagnant in 2013. Of course, the $40 billion ‘out’ is adjusted by
the $21 billion ‘in’ and its multiplier effect. But while the $40 billion
‘out’ will definitely occur, there is no guarantee the full $21 billion IMF
injection “in” will actually happen in turn.<o:p></o:p></SPAN></P>
<P
style="LINE-HEIGHT: normal; mso-margin-top-alt: auto; mso-margin-bottom-alt: auto"
class=MsoNormal><SPAN
style="FONT-FAMILY: 'Times New Roman','serif'; FONT-SIZE: 12pt">Some of that $21
billion will no doubt be ‘put aside’ by the Ukrainian central bank to replenish
its foreign currency reserves, today at around only $10 billion or less. Some of
it will be used to assist Ukrainian businesses to purchase European imports of
intermediate goods, projected to rise in cost significantly as Ukraine’s
currency continues to decline. And some of it will go to loans from the NBU to
Ukrainian businesses that will hoard the cash and not use it to expand
production. All this means that probably no more than half the $21 billion IMF
net injection will actually affect the real Ukrainian economy. Given these
‘leakages’, the multiplier effects of the IMF injections will no doubt prove to
be negative. It is not unreasonable to assume no more than a net $10 billion of
the IMF’s $21 billion will get into the Ukraine’s real economy as a
stimulus.<o:p></o:p></SPAN></P>
<P
style="LINE-HEIGHT: normal; mso-margin-top-alt: auto; mso-margin-bottom-alt: auto"
class=MsoNormal><SPAN
style="FONT-FAMILY: 'Times New Roman','serif'; FONT-SIZE: 12pt">That leaves no
more than a $10 billion net stimulus over the next two years, offset by a
‘multiplier’ of $40 billion reduction in the real economy over the next two
years. A net reduction in Ukraine’s GDP of $30 billion in the next two years, or
about $15 billion a year, represents a cumulative decline in GDP of at least
18%. And that’s a Greece-like Depression.<o:p></o:p></SPAN></P>
<P
style="LINE-HEIGHT: normal; mso-margin-top-alt: auto; mso-margin-bottom-alt: auto"
class=MsoNormal><SPAN
style="FONT-FAMILY: 'Times New Roman','serif'; FONT-SIZE: 12pt">By absorbing the
Ukrainian economy into the Eurozone, the latter is in effect taking under its
economic wing yet another ‘Greece’ and ‘Spain’. And as in the case of
those latter economies, those who will pay will not be the bankers and
multinational businessmen, but the Ukrainian people. But that is the
essential and repeated history and legacy of IMF deals globally for the last
three decades.<o:p></o:p></SPAN></P>
<P
style="LINE-HEIGHT: normal; mso-margin-top-alt: auto; mso-margin-bottom-alt: auto"
class=MsoNormal><B><I><SPAN
style="FONT-FAMILY: 'Times New Roman','serif'; FONT-SIZE: 12pt">Dr. Jack
Rasmus</SPAN></I></B><I><SPAN
style="FONT-FAMILY: 'Times New Roman','serif'; FONT-SIZE: 12pt"> is author
of the 2010 and 2012 books, “Epic Recession: Prelude to Global Depression” and
“Obama’s Economy: Recovery for the Few”, Pluto Press, 2010 and 2012. He hosts
the weekly radio show, ‘Alternative Visions’, on the Progressive Radio Network
in the USA. His website is </SPAN></I><A
href="http://www.kyklosproductions.com"><I><SPAN
style="FONT-FAMILY: 'Times New Roman','serif'; FONT-SIZE: 12pt">www.kyklosproductions.com</SPAN></I></A><I><SPAN
style="FONT-FAMILY: 'Times New Roman','serif'; FONT-SIZE: 12pt"> and his blog is
jackrasmus.com. His twitter handle is @drjackrasmus</SPAN></I><SPAN
style="FONT-FAMILY: 'Times New Roman','serif'; FONT-SIZE: 12pt"><o:p></o:p></SPAN></P>
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