For now, the public quarreling between Ukraine and its
creditors is over.
Finance Minister Natalie Jaresko will join
negotiations with bondholders next week after the government said both sides
agreed to take the talks private, ending two months of deadlock over the $19
billion debt restructuring. The agreement will “allow principal-to-principal negotiations on the
substance of a possible solution to start next week,” Ukraine’s Finance
Ministry said in an e-mailed statement Wednesday. The nation’s bonds rallied
the most in more than a week.
The breakthrough reduces the likelihood that Ukraine
will impose a moratorium on interest payments before its next one comes due
July 24. The government in Kiev has threatened to stop servicing its Eurobonds
if its proposal, including writedowns to principal, was not accepted, while a
creditor group led by Franklin Templeton insists the nation’s restructuring
goals can be met by pushing back due dates and cutting interest payments.
“The fact that the confidentiality agreement was made
and the finance minister will participate in negotiations is a sign that shows
that both sides are really serious,” Ian Hague, a founding partner at New
York-based Firebird Management LLC, said by phone Wednesday. “It signals that
the government and the creditors are closer to resolving the dispute.”
The accord comes after weeks of statements and counter
statements in which each side blamed the other for the lack of progress. A
spokesman for the creditor group declined to comment when contacted by phone.
Haircut Percentage
The first Eurobond to mature is a $500 million, 6.75
percent note due Sept. 23, which is trading at 52.64 cents on the dollar, up
1.2 cents by 10:55 a.m. in Kiev. The sovereign’s $2.6 billion of 9.25 percent
bonds maturing in July 2017 climbed for the first time in five days, gaining
1.7 cents to 49.26 cents on the dollar.
“The market is betting that the probability of
moratorium is much lower,” Sergey Fursa, a Kiev-based bond trader at Dragon
Capital, said by e-mail.
Ukraine has said the deadlock in the talks is due to
creditors’ refusal to sign a confidentiality agreement that would clear the way
for non-public information to be discussed. Bondholders said they have been
prepared for weeks for restrictions on negotiations, but that Jaresko’s legal
team was blocking the accord.
“Creditors will probably have to accept the haircut,
and an agreement will be reached after both sides agree on the percentage of
the haircut,” Firebird’s Hague said.
Washington Meetings
Other analysts, including Nicolaie Alexandru at
JPMorgan Chase & Co. have questioned the need for cuts to principal. The
creditor group has said a writedown would delay Ukraine’s return to
international debt markets and threaten its ability to meet the IMF’s
restructuring targets, which assume a resumption of borrowing by late 2017.
The confidentiality arrangement follows meetings in
Washington D.C. on Tuesday between Ukrainian Debt Envoy Vitaliy Lisovenko,
members of the creditor committee and representatives of the IMF. Jaresko
didn’t attend, noting previously that they were technical meetings to discuss
economic forecasts and not debt negotiations.
The IMF revised its forecast for the country’s 2015
economic contraction to 9 percent from 5.5 percent in May, but is yet to make
public its updated estimates for debt-to-gross domestic product, one of the
baseline assumptions on which its targets are based.
Ukraine is changing terms on its debt after a conflict
with pro-Russian separatists in its easternmost regions sent its currency into
a tailspin and drained reserves. The nation’s economy was dealt another blow on
Tuesday when Russia took away most of a price discount for natural gas,
prompting Ukraine to halt purchases.
The Washington talks are meant to ensure all sides
understand “the reality of Ukraine’s situation,” Lisovenko told reporters in
Frankfurt on Friday. “The structure of the economy is physically destroyed. We
cannot rebound quickly.”
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