Ukrainian Central Bank in Trouble

Credit-default swaps, which is a kind of insurance that will pay out in the chance of a bond defaulting, exploded for Ukrainian government bonds recently, making the country suggestible to being twice as likely to default as the financially unstable country of Greece. 

This is all thanks, in great part, to the dwindling foreign reserves that Ukraine has. Ukraine’s import/export ratio is extremely unbalanced, importing far more than exporting, as well as over fifty percent of its debts being denominated by foreign currencies, mostly the American dollar. 

What this means is that Ukraine is in desperate need for more dollars and euros in order to pay for their hefty imports as well as their debt interest, putting heavy strain on the local currency, the hryvnia. To counteract this imbalance, Ukraine’s central bank has tried selling down its personal stock of dollars, resulting in only enough reserves to pay for roughly two months worth of imports. 

Reserves are now also threatened by the savers of Ukraine because of the savers largely swapping out their hryvnia for dollars. This ‘dash for dollars’ has been seen in the countries previous financial crisis’ in 2004 and 2008, and could cause another shortage of cash. In 2004 and 2008, Ukrainian authorities were forced to impose withdrawal restrictions in order to prop up the hryvnia. This has not been implemented again yet, but with reserves being two to three times smaller than they were during the crisis’ of 2004 and 2008, it seems likely another deposit restriction will be implemented again shortly. 

Sources: Quartz

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