Ukrainian Currency Plunges Despite Stern Government Warnings

As Mark Haines calls yet another market bottom (what 8.1% unemployment? Citi says absent all its losses it will make a profit) and bases his conclusion that "this one is really the one... it is a real big rally" on his gut, things elsewhere are getting ugly. Ukraine's hryvnia currency plunged today despite the central bank's warning to 17 lenders not to buy or sell the hryvnia for less than its set exchange rate. As the hryvnia has slumped 42% against the dollar in the past 6 months, the central bank has been forced to spend more and more of its forex reserves to keep propping the currency. The Ukraine, which unlike the U.S. cannot inflate its way out of a $12.3 billion current account deficit, has received a promise from the IMF for a $16.4 billion bailout loan on the condition that it stops purchasing its currency and essentially lets it fare on its own. The results of that policy became apparent immediately as the hryvnia which had been trading just inside of the 7.98 per dollar exchange rate for the past week, tumbled to 8.235 today.

So what's a central bank to do, especially in a former communist dictatorship? Threaten banks which trade freely to pull their licenses of course:

The central bank made “verbal warnings” to the country’s larger banks last week that they may lose the right to buy foreign-currency reserves if they traded the hryvnia below the central bank’s rate, said Alexander Pecherytsyn, head of financial markets research at ING Groep NV in Kiev. Banks adhered to the order because they “fear action from the central bank, such as the withdrawal of their licenses,” Pecherytsyn said. “Some of the smaller banks trade it at a weaker rate but that doesn’t show up on the screens.”

Ukraine, which was recently downgraded to Europe's lowest CCC+ rating, which itself is a lagging indicator has seen industrial production plummet 34.1% in January while its inflation rate of 20.9% the highest in Europe. ZH still believes the biggest threat to the global economy is the domino default effect which will likely start in the Ukraine or one of its neighboring countries.