Ukraine elections: Exit polls???

Yulia Tymoshenko must have the best election campaign team. The exit polls announced the night of the Jan. 17 vote showed her only 4%-points behind Viktor Yanukovych, allowing her to have a flashy press conference looking for victory in the second-round.. It was confirmed only a day later that Yanukovych was in fact 11pp ahead of her and it seems very difficult that she will be able to close that gap on Feb. 7. The Yanukovych gap seem certain of victory not only because of the post-election statements but also from doing a-180 on IMF relations, turning from complete suspension to "more transparency, more cooperation for social standards, etc."

Whomever wins, and we may wait for a while since the second-round seems likely to trigger a string of court challenges, there will probably be a realignment in the parliament in the winner's favor, allowing a snap election to be avoided. The big business, having bankrolled both candidates (and in big amounts too - the Ukrainian election campaign is said to be the second most expensive in the world, after our very own US) for the past 5 years, have had enough and want stability more than anything. Perhaps some political stability after all, putting IMF program back on track, ensuring monthly gas payments though sadly not much in the course of anti-corruption or democratic reform.

Turkey-IMF? Don't bet on it.

Recent Turkish statements in favor of a two-year IMF stand-by agreement is no more than another "maybe" that has served the government very well for the past few months. The sides have been in talks for sure but more like Turkey receiving technical assistance from the IMF staff as any IMF member can. Nonetheless, the government's Plan A remains to go through the heavy redemption in H1 2010 with its own resources, and rely on the IMF only in the case of a currency shock and/or major spike in bond yields.

Turkey doesn't need an IMF program. It can maintain investor confidence as long as it continues implementing the fiscal tightening envisioned in its medium-term economic program announced in October, keeping an IMF stand-by as a rainy day option. Facing parliamentary elections in Q2 2011 and presidential elections in 2012, the ruling Justice and Development Party (AKP) will want as much fiscal flexibility as possible, as demonstrated by the substantial pension increases.

Moreover, the absence of an IMF deal gives the ruling party more political capital. Having taken pride in Turkey being the only G-20 country not to resort to a government bailout of the banking sector, Erdogan wants to avoid Turkey becoming the first G-20 member to receive IMF support.

The major special consumption tax hikes on alcohol, tobacco, electricity and gasoline right before year-end should also not be taken as a guarantee that a deal with the IMF will happen. Many times since May 2008 (when Turkey's last stand-by agreement ended) that the government has floated IMF rumors ahead of major fiscal hikes, apparently to convince the business community to accept the changes.

Greece worries

This week's policy forum of choice on Greece appears to be Il Sore 24... ECB's Stark on Wednesday and now Greek finance minister George Papaconstantinou. My sense is that both Papaconstantinou and his boss Papandreou get what needs to be done though there still appears to be a high-stakes game of chicken. A backroom deal should be reached but not without major drama and some serious budget changes from Greece - and little that has been proposed has generated so much fury already among public unions - covering 90% of the country's public employees. Is the population ready, and how much a Socialist government really push a Hungary-style major austerity program to a public that has grown quite comfortable over the past 20 years thanks to EU membership... all questions that will have to be answered not only for Greece but also for EU buddies Portugal, Ireland (which has actually done quite an impressive lot in fiscal austerity), Spain... and not to mention sooner or later G7 member Italy.

Back to Greece, the balance sheet offers little hope with liabilities well over 100% of GDP and double-digit deficit already questioned because of poor data reliability (in fact an EU mission led by Almunia in Athens now, to make sure the data is dependable). Any credible plan will require large-scale privatization and severe contraction of the swollen public sector, and even worse will have horrible consequences for the domestic economy: Credit is already on a sharp decline, only to be exacerbated by tax rises, such as in property. For now, banks are in good shape though an extended period of growth should take a toll at some point. Serious public unrest is possible, with the general population is getting worried only now.. press reports about safe box sales going up.

Looking into 2010...

Few people now talk about a second Great Depression... In fact, the recession is technically over. Just seven months ago, in May, some officials still feared the US banking system might end up largely nationalized if the stress tests and other policy actions did not restore market confidence. Fortunately, the plan worked, or at least something did. The financial system was battered, but it survived. Looking forward: gradual but unexciting recovery.

China?

Significant long-term concerns about overcapacity, local government financing platforms heavily leveraged, so problems will arise when lending slows down and liquidity dries up, 2011 could be very dangerous given new capacity buildup... Could this smell horribly like the Middle East after the 70's oil shock? Build all that capacity and oil heads to $10 / barrel? A lot riding on China's ability to keep utilizing any capacity build , and doing so in pretty short time frames.

Hypo Group Alpe Adria nationalized by Austrian government...

Hope the Austrian government knows what it is getting itself into... Hypo was basically treated as a cash machine by the late lamented Joerg Haider, premier of the southern Austrian state of Carinthia, to finance his populist policies. A buddy of his was a previous CEO and got involved in some dodgy lending to Balkan countries, in particular Croatia (e.g. lease deals on yachts that subsequently 'disappeared'). So it looks like fairly large-scale fraud. Austrian government nationalized Hypo without due diligence to avoid systemic risks, and when they look at the books going into 2010 some quite nasty stuff is likely to come to light...