The Cabinet will borrow to repay the clients of banks that went belly up

Photo: Eugeny Musienko

The government is resorting to an increase of the national debt in order to ensure payments to the individual clients of insolvent banks. The Cabinet of Ministers passed a decision to allocate a UAH 10.1 bn loan to the Deposit Guarantee Fund (DGF). For this, the Ministry of Finance will issue sovereign bonds for the specified amount maturing in up to 15 years and at an annual interest rate of 5%. The sovereign bonds will be exchanged for financial bills of exchange issued by the DGF on the same conditions, according to the Cabinet’s resolution No. 456 of September 17, 2014.

Full up

Since the start of the year the DGF introduced provisional administrations in 18 banks with half of them already going through the procedure of liquidation. DGF Managing Director Vasyl Pasichnyk yesterday stated that since the beginning of the year the fund paid out nearly UAH 10 bn to depositors. Another UAH 7.3 bn will have to be compensated until the end of the year provided that the number of problem banks does not increase, specified the official.

Pasichnyk also pointed out that at the moment the fund has UAH 6.5 bn at its disposal. The government began major injections of funds into the DGF in June, when the NBU issued a UAH 4.2 bn loan to the fund. Compensations of the lost deposits are paid within the maximum guaranteed amount, which is UAH 200,000. This level, however, only covers half of the deposit capital. “The guaranteed amount of UAH 200,000 covers compensations for the absolute majority of depositors – 99.3%. At the same time, the remaining depositors account for over half of all deposits,” informed the head of the DGF.

The fund is hoping to obtain the money from the claims against bank debtors, according to Pasichnyk. Overall, the claims have been filed for UAH 24 bn. The cases for another UAH 13 bn have already been transferred into enforcement proceedings.

Due to the difficult situation in the banking sector, the NBU slightly alleviated conditions of allocating loans for the DGF. Information appeared on Friday that the NBU would be issuing loans to the DGF not for a year, as it has been until recently, but for three years. The guarantees of such loans will include not only sovereign bonds, but also property rights on future proceeds to the account of the fund in the NBU.

Despite this simplification, a loan for the DGF, which is being drafted by the Ministry of Finance, is cheaper. The matter is that the NBU will issue the loan under collateral of securities at a price not lower than the inflation index. By the end of the year the inflation could speed up to 19%. At that, the borrowing from the government is much cheaper at a mere 5% per annum interest and a term of 15 years. Most likely the securities that the Ministry of Finance will issue for the fund will be acquired by one of the state-owned banks. Taking into account the long maturity term and the fact that the interest rate is clearly not market-based, commercial structures are unlikely to be interested in these sovereign bonds.

Saving the drowning

Furthermore, the DGF can count not only on the money from the government and the NBU. Earlier, NBU Governor Valeriya Hontareva said the US $500 received from the World Bank will be directed “exclusively at replenishing the funds of the DGF”. This is a long-term loan, which the WB is allocating for the term of 16 years with a seven-year preferential period at a low combined interest rate.

Under the preliminary agreement between Ukraine and the international organization, the second tranche should be allocated at the beginning of 2015. On Friday, the press service of the Ministry of Finance, referring to the negotiations of Minister Oleksandr Shlapak and WB management, informed that the new loan could be allocated by the end of this year. For this, the Ukrainian side will undertake to fulfill a number of conditions. “It is important that the macroeconomic and financial situation in the country remain stable and the cooperation program with the IMF continues,” informed the press service. The WB also expects that the government, among other things, will perform restructuring of the gas sector and recapitalization of the banks.

The government does not provide a clear explanation as to why the DGF is actively accumulating capital. Anticipating panic statements about the possible insolvency of more banks, the NBU says there are no grounds for collapse of one of the major financial institutions. NBU Deputy Governor Oleksandr Pisaruk informed that by the end of the year the regulator believes that several non-systemic commercial banks may exit the market, although neither the NBU nor the DGF have concrete plans as to the number of the banks subject to liquidation. As Capital wrote earlier, the IMF allowed the government to allocate UAH 46 bn for recapitalization of the banks in 2014-2015. However, only the largest banks can expect to get a slice of that pie.