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Amid the global financial crisis, several European countries faced serious economic distress and turned to external creditors, including the EU and IMF, for emergency financing. This multilateral support relieved investors and calmed worries of full-fledged balance of payment crises. Nevertheless, these economies are not out of the woods. As first noted in an RGE note in October, political developments could push loan programs off track, reigniting crisis fears. A new RGE blog post examines political risk in four countries that seem at particular risk of having their IMF programs derailed by politics: Iceland, Latvia, Romania and Ukraine. The following analysis is drawn from that blog post.
Despite Iceland’s fulfillment of official loan conditions, the next disbursements of IMF and related Nordic loans are now at risk of falling through, following the Iceland president's veto of the the so-called Icesave bill. The bill would have amended the terms of the €3.8 billion reimbursement to the UK and Netherlands as compensation for the more than 300,000 depositors who lost savings in Icesave, the internet arm of failed Icelandic bank Landesbanki. Iceland’s parliament accepted the bill in late December, but the President vetoed it on January 5 under heavy public pressure. A quarter of the country's electorate had signed a petition against the bill. Immediate consequences included Fitch downgrading Iceland’s sovereign debt to junk status and S&P placing it on Creditwatch with negative implications.
In Latvia, the top court ruled in December 2009 that the government violated the constitution when it cut pensions as part of austerity measures required under the US$10.5 billion EU/IMF-led loan agreement ($2.35 billion of which is being contributed by the IMF). The cabinet now has to find money to repay the pensioners, which will likely exacerbate rifts within the ruling coalition ahead of the October 2010 parliamentary elections and threaten the IMF-led bailout.
Romania’s US$26.4 billion EU/IMF-led loan program (US$17.1 billion of which is being contributed by the IMF) appears back on track after a bout of political volatility in late 2009 threatened to derail the program. Nevertheless, it would be premature to signal the all-clear. The country’s recent elections are over, the political storm has calmed, and the IMF program appears back on track. But political risk lingers. The government holds a very slim majority in parliament and the governing coalition is made up of a disparate group of parties and independents, meaning its support is very fragile. So while political turmoil may have eased in the near-term, this is unlikely to last. Loan tranches are scheduled for quarterly disbursements through March 15, 2011, and a new flare-up of political turbulence could delay or halt future loan disbursements.
In Ukraine, the IMF signaled that cooperation would resume once political tensions settle following the country’s presidential elections, the first round of which proved inconclusive this weekend, leading to a runoff vote. Yet even the final vote might not bring policy clarity. One of the two contenders, Prime Minister Tymoshenko, accused her main rival, pro-Russian opposition leader Victor Yanukovych, of planning major electoral fraud before the election. So it doesn’t seem like consensus on tough fiscal consolidation will be easily reached. Furthermore, a new president could also dissolve parliament and call for early elections in the spring, further delaying loan disbursements. In sum, Ukraine may be facing another politically turbulent and cash strapped year in 2010.
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