The wrinkles in aid to Ukraine

Columbia University Financial Law Visiting Scholar Jeremy Pam, who did sovereign debt restructuring (including for Iraq) at Cleary Gottlieb and then went  off to Baghdad for the Treasury Department and Kabul for the State Department, kindly offers some clarification of points I raised on Tuesday about assistance to Ukraine.  He writes:

1. Here’s some insight on the accounting for loan guarantees generally, from an April 2013 CRS report on US Foreign Aid to Israel:

Since 1972, the United States has extended loan guarantees to Israel to assist with housing shortages, Israel’s absorption of new immigrants from the former Soviet Union and Ethiopia, and its economic recovery following the 2000-2003 recession that was sparked by a Palestinian uprising (known as the second intifada). Loan guarantees are a form of indirect U.S. assistance to Israel, since they enable Israel to borrow from commercial sources at lower rates. Congress directs that subsidies be set aside in a U.S. Treasury account for possible default. These subsidies, which are a percentage of the total loan (based in part on the credit rating of the borrowing country; in the case of the loan guarantees in the 1990s, the subsidy amount was 4.1%), have come from the U.S. or the Israeli government.

2. Here‘s a subtle discussion by Simon Johnson and Peter Boone on both the political and policy dynamics of IMF assistance to Ukraine and the larger problems caused by pressure on both the West and Russia to provide large, relatively unconditioned aid to Ukraine.

3. The questionable international law doctrine of “odious debt” seems unlikely to be of much help to Ukraine, particularly as given the numbers that Johnson and Boone provide about Ukraine’s concrete debts (to Russia and to other creditors) that have been coming due it seems reasonable to assume that Russia’s late-in-the-game subscription to $3 billion in Yanukovich-era sovereign bonds mostly went to keeping the ship of state afloat after the EU/IMF deal fell through.

4. Boone and Johnson do not suggest any easy solutions. A quick bailout will just defer needed reforms (they’d previously written here about the economic and political need for a more Western-oriented Ukraine to bite the bullet on ending the gas subsidies enabled by the agreement with Russia to discount gas — in part for the extension of the lease to Sevastopol!  Putin described the gas bill discount for the naval base extension as “exorbitant”, saying “there’s no military base in the world that costs this much money.”

On the other hand, a “disorderly” debt default is always scary. The best solution implied might be what we used to call an “orderly” debt restructuring, but the problem with that is that there are not that many people around anymore (both inside the official sector and outside) with the skills and experience to do it well. This is what I take to be one of the real lessons of the Iraq debt deal — unless there is a new appreciation of the value of such skills and experience, we may not look upon its like again….

So if I understand correctly, the Congress prefers loan guarantees because only a small fraction shows up on the books.  It is not clear to me yet whether guarantees are really an effective way of producing more money for Ukraine, though I suppose without them no one would ante up.  Little of the aid is likely to arrive quickly, especially if the EU and US insist on needed reforms.  Debt reduction will be difficult because a lot of the money is owed to Russia, putting the West in the awkward position of getting Putin his money.  Default could make a messy situation worse.  Lots of wrinkles in aid to Ukraine.