Friday, August 28, 2015

Tinkering around the edges

Ukraine’s deal with its creditors is less impressive than it appears

AT FIRST sight, it was a triumph. After months of negotiations Ukraine and a committee of its creditors (which include Franklin Templeton, an American investment house and BTG Pactual, a Brazilian one) reached a deal this week to restructure the country’s international bonds, as well as a smattering of other sorts of debt, worth about $18 billion. Payments have been pushed back, meaning that the government will not need to cough up any principal or interest on the debts in question until 2019. The principal on the bonds will also be cut by 20% on average.

This is a better deal for Ukraine than many were expecting. It is rare for a country to get a haircut on its debts without also defaulting (one exception is Greece). When the negotiations began, the creditors had refused even to consider writing off any of the country’s debt, arguing instead that delaying repayment alone would be enough to right Ukraine’s finances. The Ukrainian government’s repeated threats to declare a moratorium on debt repayments—a default by another name—may have helped soften their stance. (That it did not have to follow through will help Ukraine whenever it next tries to borrow commercially.)


But Ukraine’s position was stronger than it might have seemed, thanks to the stance of the IMF. The fund has already lent Ukraine about $11 billion since the conflict there began last year. Ukraine needs further help to remain solvent, and thus to keep paying its creditors. The fund has pledged to lend another $11 billion by the end of 2018. But as a condition for disbursing the next $1.7 billion, due some time in the autumn, following a review of the country’s economy, the fund has demanded that Ukraine’s debt be restructured. To make the burden sustainable, and thus justify further lending on its part, it said that Ukraine would need to write off $15.3 billion in debt and interest payments by 2018 and to reduce its public-debt-to-GDP ratio to 71% of GDP by 2020.

Taking into account debt that has already been restructured—including bonds of the state import-export bank and the state savings bank—Ukraine will probably meet the first condition. That depends, though, on all owners of Ukraine’s international bonds, of which there are hundreds, accepting the deal. Russia, which holds a $3 billion bond due in December, has already declared it unacceptable.

Both the government and the creditors claim that Ukraine is also on track to meet the debt-to-GDP condition, provided economic growth is in keeping with expectations. If so, the IMF can keep lending. But that looks too optimistic. By the end of the year, Ukraine’s GDP may be nearing $70 billion, a fall of 60% in dollar terms over the past two years. As it is, it fell by 17% year-on-year in the first quarter, and 15% in the second (see chart), making the IMF’s debt-to-GDP target a challenge, to say the least. Moreover, roughly $50 billion of public and publicly guaranteed debt, including concessionary loans, was not part of the negotiations. (Indeed, as private creditors like to point out, Ukraine will repay the IMF over $4 billion before 2019.) The deal amounts to a minor cut in Ukraine’s total stock of public debt, from about $71 billion to $67 billion.

In the short term, moreover, the agreement will do little for the average Ukrainian, now far poorer than he was at the end of the Soviet Union. The hryvnia, Ukraine’s currency, is still feeble: inflation is nearly 60%. And the long-term prospects are little better. Even if the war stopped tomorrow, the country would need tens of billions of dollars to rebuild itself.


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