MOSCOW — Nobody knows how the endless dispute will
play out between Athens and the European leaders who hold its purse strings.
But in Kiev, another European capital in the grip of debt talks, one thing is
certain: The Ukrainian government does not want to end up like Greece,
squabbling with creditors for years.
So, with support from the International Monetary Fund, the Ukrainians are pressing hard to force foreign
investors — including Franklin Templeton, a giant bond fund — to accept big
losses in an initial bailout deal.
Western donor countries are propping up the Kiev
government financially; Ukrainian officials say they should not be spending
that money to pay off bond funds while there is a war going on with
Russian-backed separatists. The I.M.F. has said Ukraine must save $15 billion by reducing payments to
commercial creditors over four years; it’s a requirement of the bailout.
In early negotiations that opened Tuesday in
Washington, the funds — led by Franklin Templeton, which is based in San Mateo,
Calif., and is Ukraine’s largest single creditor — have resisted a deal to
write off part of the debt, arguing instead for extending the repayment period
until 2019. In the creditors’ analysis,
Ukraine’s economy will recover quickly enough to make
the payments by dipping into gold and foreign currency reserves.
The government is asking for an immediate 40 percent
reduction in principal. If bondholders hold out, the Ukrainian officials say,
an initial bailout might not work, and Ukraine could be back at the table with
creditors again and again — mirroring the situation in Greece.
“If there is a lesson to learn from Greece, it is the
need to be very aggressive from the very beginning on what kind of haircut is
needed,” Ivan Tchakarov, an economist at Citigroup who follows Ukraine, said in
a telephone interview.
Officials in Kiev have also been hinting strongly that
the creditors have only themselves to blame for ignoring glaring signs of
corruption in the government of former President Viktor F. Yanukovych.
After he was overthrown by street protesters last
year, it was discovered that Mr. Yanukovych’s lavish private residence included
a zoo, a classic car collection and a golf course — clearly where millions of
dollars in public money had ended up.
Michael Hasenstab, a lead investor with Franklin
Templeton, had poured about $7 billion into Ukrainian bonds in the years before
the change of power in Kiev. That investment is worth about $4 billion today.
The loss comes to about 1 percent of a global bond fund he oversees. Despite
the loss, the fund’s return has been positive this year.
“We do look for situations that are out of favor,” Mr.
Hasenstab said in a video released by the company in April last year about the decision to invest in
Ukraine.
Before the crisis that began with
protests in Kiev in November 2013, Ukraine’s public debt ratios were low. So
despite its many other problems, investors were drawn to the bond market.
“When we go to a country, when we are on the ground
like we are right now, it’s a very different story than is portrayed in the
Western media or the conventional wisdom in the market,” he said in the video,
which was released by Franklin Templeton and set in Kiev.
In
2013, the former Ukrainian government lobbied Franklin Templeton to hold its
bonds by sending Serhiy
Arbuzov, a first deputy prime minister, to San Mateo,
even as the political and economic situation at home was unraveling. The
country was negotiating to join a Russian-led trade bloc, running counter to
Western foreign policy goals.
At the time, some investors argued they would win
regardless of the geopolitical outcome, since the I.M.F. or Russia could be expected to bail them out with public sector
aid to Ukraine.
Now they aren’t so sure. The bondholders have formed a
negotiating committee. An interest payment is due on July 24, and the first
repayment of a bond on Sept. 23. A majority of Ukraine’s outstanding debt was
issued under former President Yanukovych, who was elected in 2010. Some of the
debt dates to a previous, pro-Western government under Viktor A. Yushchenko. The
last bond was floated in 2013.
Franklin Templeton’s press office declined to make Mr.
Hasenstab available for an interview. The company has emphasized that it is a
long-term investor in Ukraine, arguing that avoiding a write-off will allow
Ukraine a quicker return to commercial credit markets, and a faster recovery. A
representative of the bondholder committee notes that Franklin Templeton and
other investors buy bonds with maturity longer than presidential or
parliamentary terms, signaling a commitment to the country rather than any
particular government.
The I.M.F. — while not buying the argument that a
previous government’s misdeeds provide an excuse to renege on Ukraine’s debt —
has suggested that the creditors should accept serious losses, basing its case
on a need to keep Ukraine’s debt-to-gross-domestic-product ratios from
ballooning out of control.
In another show of support for Ukraine’s government in
the talks, the I.M.F. said on Thursday that it had reached a staff-level
agreement with Kiev on policies needed to disburse a $1.7 billion loan
installment.
The creditor committee insists it is doing its part to
help Ukraine by deferring payments, while also defending the interests of its
clients, which include American retirement account holders and retail
investors.
In a statement, the committee said it had provided
Ukraine with “a full, comprehensive restructuring proposal that meets all
I.M.F. criteria and offers nearly $16 billion of relief for Ukraine.”
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