putukraineThe Ukraine is a country where angels fear to tread…..but not the EU.

As I posted yesterday, the EU is way out of its depth in Ukraine. It hasn’t so much bitten off more than it can chew as popped a red-hot potato into its omnivorous mouth.

‘You have removed this cancer from our country’, former Prime Minister Tymoshenko claimed in front of a euphoric crowd in Kiev yesterday. But there are two problems with her analysis: President Victor Yanukovych is refusing to resign; and he has every right so to do, having been elected by democratic vote four years ago, as a result of an election described at the time by international monitors as “impeccably fair and free from intimidation”.

Yanukovych was of course voted in with the overwhelming support of the Russian speakers in the South, and he has behaved like a voracious barbarian. But he wasn’t imposed on anyone: Ukraine is Ukraine until one partitions it.

But the chief factor that’s going to smack the West right between the eyes is the country’s hopeless debt position: to be more precise, a situation that is hopeless without Russian help…and a situation that is urgent in the Greek sense of the word.

The country’s debt to GDP ratio is under 40% and thus nowhere near to the ClubMed levels: but a whopping 25% of the entire debt is in short term bonds that must be repaid by mid 2015. Long before the Kiev demos got going, the country’s leaders knew that  bankruptcy and sovereign default were inevitable, because the economy is in bad shape, – and no way capable of generating the cash to pay off the pressing bond maturities.

The only way that bond yields have been kept within reason so far is that Moscow has been buying vast amounts of Ukrainian debt at heavily discounted levels. But once things began to look dodgy for Yanukovych, Russia deliberately pulled back. Not only has it no plans to buy further debt, the Kremlin is politely (so far) asking for the Ukrainians to pay their energy bills.

In that context, you’d have to be an idiot to leave Putin out of the truce talks. But then, the EU is run by idiots…as indeed is the US. John Kerry is talking this morning about bazookas and packages being available to help: but this is one occasion when talking a good Geithner game isn’t going to cut it.

Ukrainian securities suffered the worst sell-off on record last week. Any Bourse or bond trader now betting to get the yields down simply isn’t well-informed: whether we like it or not, victory for the demonstrators means inevitable fiscal disaster for their country.

The knock-on effect of a Ukrainian default would not be pretty….and it’s not as if Brussels didn’t know this beforehand: the S&P’s sovereign survey of October 2013 confirmed the inherent danger the Ukraine presents to the global economy:

ukraineno2debtAlthough the Russian Federation owns a lot of the debt, observers calling default “a massive blow” to Moscow haven’t done their homework: for the time being at least, Russia’s reserves are in good shape – and Ukrainian debt still only about 10% of it. As ever in 2014, the fear is for the emerging economies, and the high likelihood of Ukrainian collapse pushing up their yields.

Finally, a fourth factor has reared its ugly head – as it tends to do in Eastern Europe whenever things are going wrong. Ukrainian Rabbi Moshe Reuven Azmanhas urged Kiev’s Jews to leave the city and even the state, amid talk – as he put it – of “constant warnings concerning intentions to attack Jewish institutions. Edward Dolinsky (another senior Ukrainian Jew) has asked Foreign Minister Avigdor Lieberman to “secure the [Jewish] community.”

In Eastern Europe, I’m afraid, there are only very rarely good and bad guys.