My draft nomination speech for Natalie Jaresko for the Coveted 2015 Finance Minister of the Year contest
Natalie Jaresko is as we speak working a mess that would make other candidates for 2015 Finance Minister of the Year need a steady replacement of adult diapers. She is a true Tail Risk Killer. With eyes keen to detect the good and the bad, and in spite of all the follies and frailties she sees, she sincerely likes mankind. Even though though she lives only a thousand miles or so from Vladimir Putin and can smell his stench from her open window, she sincerely likes mankind.
A good finance minister does not emphasize either the very bright or the very dark. This makes them good negotiators: they look at human nature very tolerantly. They see people as rarely great and good, sometimes as intolerable. But there is no sense that the world of men is completely vile to them.
Insofar as their job goes, beauty is unimportant to the finance minister. Perhaps it is fairer to say that they either did not see ugliness or are indifferent to it. The job is a very serious and arduous one and there is no time for mere decoration of it. A good finance minister does not ask to be flattered. They are content with who they are and they efforts to improve who they are.
Natalie Jaresko, the finance minister of Ukraine, has seen a lot of fireworks in her brief tenure. She had to assess the state coffers from a war-finance footing. And now she is playing a nice chess game with state creditors form a position of imminent default. My admiration is high, reading a sternly realistic character that has been taught by experience that there are pitiless aspects of life. Her no non-sense approach is not meant to be hard-line as much as, well, there is no point in expressing anything but the implacable truth of things.
Here’s some truth which I think she lives by. Propping up insolvent entities never works in the long run. A Ukrainian failure to deal with its insolvency—especially in its financial system—will prolong the country’s economic agony. It merely turns healing economies into zombie economies.
There are some very beneficial corollaries that flow from these truths:
She recognizes the Ukraine and its creditors have to take some losses and move on.
She can’t play bail-out queen to Ukrainian debtor.There is no Ukrainian equivalent to Uncle Sugar.
She is letting failing banks fail.
I don’t care that she was born in Chicago to Ukrainian immigrants. Nor do I give a flip about her past employment at the US State Department. Nor do I do much but snicker at accusations of misdeeds in her private-sector role in finance. She worked in venture capital and investment banking, which is by nature a rather slushy business full of compromise. There is, obviously, an entire parade of jobs like this. What really matters is what markets think about what she is doing right now.
The markets are saying she is working a minor miracle. Ukrainian bond prices are bidding even as default almost-surely looms. OK, so it not a miracle. But it is a marvelous display of markets seeing clarity of message and meaningful leadership. Have a look under the hood.
Understand this. Ukrainian bonds are clearly going to restructure. At best, holders of the debt will have to accept reworked terms. At worst, there will be outright default amounting to creditors receiving recovery.
What the bid in bond prices mean is that creditors are feeling better about the recovery they will be receiving. At the low point as of April 1, 2015 the credit curve at each maturity was getting a sub-40 bid. This indicates that the standard 40% recovery rate exceeded market expectations on realized recovery. The day after a pivotal Jaresko webcast on debt restructuring, the bid on bonds exceeded the 40 bid across all maturities, I say an average bid price over 46. This is due to the non-confrontational restructuring of Ukreximbank, revenue improvement leading to an unexpected March central budget surplus, and market recognition of substantive leadership in the ministry of finance.
About that leadership item. Distressed situations are like a chess game where you take over playing white in an unfinished game. There is an assessment of how bad things are. This assessment of the board leads to two possible choices of middle game strategy. The first is the the honest and forthright “we are broke and creditors will have to eat some rotten asparagus from the garbage can” strategy. The second is the “I am ashamed and will not come clean” strategy. All other modes of play are variations or combinations of these two.
The former almost always leads to a workable conclusion. The second almost never works.
Minister Jaresko outlined the initial debt restructuring plan, based on IMF conditions. An ad hoc committee of the largest creditors in possession of Ukrainian bonds stated that they wished to avoid a nominal haircut, implying that they wish to convert their paper into higher-yielding paper of extended maturity, perhaps with a coupon moratorium. By the way, Russia was not included in the committee and the IMF quote simply couldn’t care less if Russia chokes on it. And then Moody’s—hilariously late to the game as always—downgraded Ukraine one notch to CC.
No dice regardless. Jaresko did not agree to this proposal, as it would make the IMF’s 70% Debt-to-GDP ratio condition impossible. Instead she reiterated the corollaries to the implacable truth of things:
Negotiations will conclude in May.
Kyiv bonds are considered sovereign.
Even strategically important businesses like Ukrainian Railways, Ukreximbank, and Oschadbank are not sovereign and each entity will need to undergo separate restructuring talks.
Russia will get no favored treatment.
Jaresko appears to have vastly improved revenue collection and fiscal balance in March. In fact, the central budget is stated as surplus in Q1 2015. We’ll see if these provisional figures bear out, but even a fraction of this move is a massive improvement over 2014 deficits.
This in spite of economic conditions that statistically look like a depression, a financial crisis of epic size and scope, and the need for war finance to defend the country against a large and aggressive invader that is led by a lizard. Who absolutely sucks.
Peace out, Natalie. Keep your eyes keen to detect the good and the bad, and in spite of all the follies and frailties you see, I hope you always like mankind. Even though you live only a thousand miles or so from Vladimir Putin and can smell his stench from your open window, I hope you always like mankind.