"Dec. 18 (Bloomberg) -- Ukraine’s hryvnia plunged 16 percent in two days to a record low against the dollar after a government official said the weakening currency may trigger defaults on more than half of loans."
Errrr.... that strikes me as supremely dumb. So last month the IMF provided a $16.5 billion package to the Ukraine to help avert a default. If a lot of your debt is denominated in US Dollars (, which it is for many smaller developing economies even though the larger ones have made big strides in issuing local currency denominated debt) then you can get really effed if your currency depreciated against the dollar but you're still on the hook for repaying the debt in dollars. It's not necessarily just poor fiscal management that can get a country into this position. Sure, that was probably the case in e.g. Argentina in the 90s/2001/2002 but take Russia now for instance. They are sitting on 400-something billion in reserves, which are the result of some prudent fiscal management. And their currency fell 10% (against the Euro -- a bit more the appropriate benchmark for them) since the beginning of the month and 14% since November. Investors have pulled out more than $200 billion since August. And why? Well, in part b/c the banking sector is shoddy and b/c Russia has a past of currency crises so that amplifies jitteriness, which is obviously really bad if you're in a tight spot with your currency. But a good deal of it was a huge degreee of risk aversion because of the August campaign and b/c of the repatriation of rik capital to the US, Europe, etc (b/c people, and by people I mean banks, needed to reduce leverage). So not really b/c of poor fiscal management.
So let's say Ukraine wasn't a huge spendthrift and so the popular word "bailout" that's being used for the IMF package is not really appropriate and it's a legitimate effort, etc. If the IMF lends you 16.5 billion so you can stabilize the currency so you don't have to default on your dollar-denominated debt... it seems really stupid to then say: "We may have to default on our dollar-denomianted debt." B/c that immediately undermines the confidence the IMF package was supposed to give, makes investors pull out money, depreciates the currency and.... as a result you'll have to default on your dolalr-denominated debt. It just seems so silly.
Ukraine credit default swaps trade at 30%. In contrast, Russian CDSs trade at 7.5%. (that means that to insure $1 million in Ukraine debt you'll have to pay someone 300 grand.) Here's a graph of the hryvnia (up means worth less b/c it means you'll have to pay more hryvnias for one US dollar):
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