Ukraine warns on debt haircuts

Ukraine has warned debtholders including Russia that they should prepare to lose money as the war-ravaged country seeks to stave off a default as said in an article of FT.

Natalie Jaresko, Ukraine’s finance minister, made the comments to investors as Kiev seeks to restructure its government debt following a $17.5bn loan agreement with the International Monetary Fund.

Ms Jaresko said the country’s debt operation, which targets more than $15bn of debt, “will probably involve a combination of maturity extensions, coupon reductions and principal reductions”.

Ukraine’s bond markets had rallied early in the week following news reports that the country would not seek to impose principal reductions.

Stressing there would be no special treatment for any creditors, including Russia, she added: “We maintain that we will treat all the claims on the Russian bond on the same basis as any of our other commercial creditors. We invite the holders of the Russian bonds as well as all of our other eurobonds to participate in this process on the basis of transparency, good faith and inter-creditor equity.”

Following the annexation of Crimea by Russia last year, Ukraine’s external debts have looked increasingly unsustainable. Kiev has close to $8bn in external sovereign debt payments to make in 2015 while the country’s foreign exchange reserves have shrunk to just $5.6bn.

However, any agreement to ease Ukraine’s debt burden is likely to require the co-operation of Russia, which holds one of the country’s largest bonds.

There is little precedent for countries engaged in conflict to reach an agreement over debt restructuring.

The IMF estimates Ukraine’s funding gap at $40bn, and has assumed that co-operation between Ukraine and its creditors will play an integral part in the country’s economic recovery.

Analysts disagree about the extent of losses investors in the country’s debt should expect.

However, others expected the country to extend its debt repayment dates and eschew a haircut.Ukrainian bonds trade at less than half their face value, indicating creditors expect to lose some of their original investment. 

Casting a shadow over proceedings is the question of whether Russia will block an agreement. As one of the country’s largest creditors, Russia could block a deal on restructuring the debt. Last month, Russia’s finance minister Anton Siluanov was reported as saying that the country had already included the money it was owed by Ukraine in its budget.

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