Printing Press: Kiev’s Last Hope

English version of the article by VY. Katasonov «Печатный станок как последняя надежда Киева«.

Yury Lutsenko, an MP and the leader of Bloc of Petro Poroshenko party, reported that the Ukraine’s National Bank started the printing press. Allegedly it went ahead after Prime Minister Arseniy Yatsenyuk gave his approval. Few people paid attention to this information. Soon Yulia Timoshenko confirmed the news (she is an opposition leader). She said the uncontrolled emission without back-up should be stopped. In January the emission rate was 31billion hryvnias…


The issue hit the agenda to be picked up for discussion by politicians and journalists.

The Prime Minister is in a tight spot. The money received as the first tranche in mid-March (5 billion US dollars) is spent. There is no certainty about the next tranche to be released (the talks on debt restructuring have become stymied). The government has no money for social spending (pensions, wages etc.). It all left Yatsenyuk little choice but to start running the printing press.

All of a sudden the issue came to the fore. It looks very much like a plot to do away with the incumbent Prime Minister. The printing press was started to run as far back as last year. The emission has no back up (central bank’s gold and currency reserves, bonds, promissory notes, economic production…). The only thing to come along with the emission is issuing debt securities. That’s what is happening in Ukraine.

The Ukraine’s public debt grew immensely last year. Media mainly pays attention of foreign debt, but the internal debt grew too.

Here is the official Ukraine’s Ministry of Finance internal debt data (billions of hryvnias):

01.01.2013 – 206, 5

01.01.2014 – 284, 1

01.01.2015 – 488, 9.

In 2013 the internal public debt increased by 77, 6 billion hryvnias (38%). The increase was 204, 8 billion hryvnias in 2014 (72%). To cover the debt the Ministry floated debt securities. The consumers are Ukraine’s commercial banks and other organizations (insurance companies, investment funds, etc.) and the National Bank of Ukraine. The Bank buys out the lion’s share of the debt. According to the Bank’s statistics, it bought 181, 9 billion hryvnias of government bonds in December 2014-January 2015 (besides it purchased currency bonds). It did not sell currency bonds last year, but kept on accumulating bills of debt. The value of government bonds purchased by the Bank was almost equal to 90% of Ukraine’s internal growth.

Pavlo Rizanenko, member of the parliament and chairperson of Verkhovna Rada Committee for Financial Policy and Banking Activity, confirmed the fact of emission. According to the information he got from the Bank, in 2014 the amount of emission was 176 billion hryvnias. Before that the emission had been equal to 20-50 billion. Rizanenko said private sector provided no loans to the government, so the National Bank spends the regulator’s money to buy out the bonds. Experts on macro economy call it “monetization of debt”. To put it simply, it’s nothing else but printing money. Rizanenko said the emission rate was extremely intensive. The Bank’s printing press has become an important source of support for the current regime. It is a classic case of emission without back up, just exactly what boosts inflation.

Ukrainian experts believe the hryvnia will fall along with inflation going up. Some say the national currency rate will exceed 100 and even 200 hryvnias per USD. These estimates are well substantiated. According to the Ministry of Finance, the public debt reached 514, 3 billion hryvnias as of May 1, 2015. During the first four months of the year the average growth was 25, 4 billion, or 5, 3%. It does not look so stunning in comparison with the indexes of last year. In previous years the budget holes were patched up at the expense of foreign debt going up. It was equal to 38, 8 billion hryvnias as of January to go up to 42, 9 billion dollars. The increase was 41 billion dollars. The fall of hryvnia at the beginning of the year facilitated the process.

Some foreign currency reserves accumulated thanks to borrowing created an illusion of the government fulfilling its obligations in full. The reserves have been depleted, so there is nothing left but to start the printing press. The National Bank of Ukraine said it would not launch rampant emission. Under the pressure from the International Monetary Fund (1) it promised not to let the emission exceed 27% or 91 billion hryvnias in 2015. In January-February 2015 the average emission was 10, 2 billion hryvnias. In the spring it went down to reach only 4, 8 billion hryvnias in March. In April the Bank emitted only 3 billion hryvnias and sold bonds valued at the same sum. In May the pure emission was 7, 9 billion. The reserves depleted in summer to make the Prime Minister give an order to start running the printing press. The details will be known in a month as soon as the National Bank of Ukraine published the data as of June.

Buying out bonds is not the only way to fill the holes in the budget. The Bank can refinance commercial banks. Classic refinancing presupposes granting credits by a central bank to commercial banks so that they could provide funds for economy. The produced goods serve as a back-up. In case of Ukraine, the Bank boosts inflation because, directly or indirectly, it makes commercial banks purchase government bonds. When it is done directly, the money is spent on purchasing them. In case of indirect influence, the commercial banks accumulate bonds to guarantee further refinancing from the National Bank. In 2014 and 2015 average refinance indexes exceeded the previous years. For instance, in February, 2015 the National Bank granted 30, 8 billion hryvnias to 26 banks. This money does not flow to economy being kind of paper commodity produced by printing press.

Yulia Timoshenko did not miss the opportunity to criticize the government for the currency fall. According to her, the reason was monetary emission without any back-up and the Ukraine’s National Bank’s uncontrolled refinancing of commercial banks. It should be understood that by refinancing the commercial sector the National Bank tries to compensate for the deposits outflow. In the period from January 1, 2014 up to February 1, 2015 the National Bank of Ukraine provided 121, 8 billion hryvnias for refunding with a term of up to 30 days, including Russian banks. Timoshenko believes the National Bank’s money is buried in the sand. Or, to be more precise, is being stolen. The former Prime Minister knows what she is talking about, so the statement can be trusted. According to her, 109 billion hryvnias of refunds were not returned to the National Bank. She said the money, a quarter of the Ukraine’s budget, will never be returned. According to her, she only cited official data, there was nothing emotional in her message.

According to the forecast of the International Monetary Fund made public at the beginning of the year, the inflation in 2015 could equal 46% to exceed the record high 39, 7% in 1996. The prices have grown by 40% this year. It gives a reason to believe the inflation rate will exceed the Fund’s forecast. Ukraine’s inflation rate is the 13th highest in the world (the estimate is based on the indexes of the first five months of 2015). If the information about the National Bank starting the printing press according to the command given by Yatsenyuk is right, Ukraine may be hit by hyperinflation like Germany was in the 1920s.

By the way, skyrocketing inflation is not the only similarity if you make a comparison. As the issue became public, an opinion was voiced that Prime Minister Arseniy Yatsenyuk, Victoria Gontareva, the head of National Bank, should resign. The irreconcilable political opponents are at one in their opinion, for instance, YuryLutsenko, the leader of the Bloc of Petro Poroshenkoparty, and Yulia Timoshenko from All-Ukrainian Union «Fatherland» or Batkivshchyna hold the same view. Then who should take the place of resigned officials? There is an intriguing scenario unfolding. Yulia Timoshenko lambasted Victoria Gontareva. According to her, the President and the government should address the world community for help and ask for a candidate with high reputation.

There is some logic here. Once the Ministry of Finance is headed by Natalie Jaresko, an ex-U.S. diplomat,then the National Bank should be headed by some lady coming from another country. It would be better if a candidate had ties with the US Federal Reserve System as that’s where the most respectable people work, according to Kiev’s vision of things. Then it would be right to make another and final step — take away the signboard The National Bank of Ukraine and substitute it with the one reading The Federal Reserve Bank (Ukraine).

(1) Money supply is the entire stock of currency and other liquid instruments in a country’s economy as of a particular time. The money supply can include cash, coins and balances held in checking and savings accounts. Economists analyze the money supply and develop policies revolving around it through controlling interest rates and increasing or decreasing the amount of money flowing in the economy. Money supply data is collected, recorded and published periodically, typically by the country’s government or central bank.



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