Ukraine and creditors locked in debt spat

Elaine Moore

Ukraine is preparing to meet international creditors in San Francisco this week as the war-torn country warns it is prepared to impose a debt moratorium in September unless a restructuring deal is struck.

According to Ukraine’s Ministry of Finance, the meeting on Wednesday represents the last opportunity for the two sides to reach full agreement in advance of a $500m bond due to mature on September 23.

In the absence of a deal Ukraine has stated it will seek “alternative options for financing its International Monetary Fund-supported programme”, which are understood to include a debt moratorium.

Ukraine hopes to reduce its debt burden by $15.3bn over the next four years as part of a $40bn rescue plan designed by the IMF to stabilise the country as its struggles with recession and pro-Russian separatism in the east continue.

However, negotiations have stalled over the question of whether the country is suffering from a liquidity or solvency crisis.

Kiev, which has continued to make interest payments on debt throughout negotiations, argues that investors must accept a principal writedown for the country to meet the terms of the IMF’s plan.

However, a committee of international creditors with $8.9bn of the country’s debt, including US asset manager Franklin Templeton, argue the problems are temporary and payments should be delayed, not written off.

Following months of fruitless talks, the committee recently offered to accept a 10 per cent writedown on their holdings, suggesting that a compromise was possible.

Ukraine rejected the offer, which came with conditions including a potential reversal if the country’s situation improved, and sent a counterproposal that is understood to include a lower haircut than the 40 per cent the country originally sought.

International commentators have advised the two sides to reach a deal.

In a comment piece published last week, Nathan Sheets, US Treasury undersecretary for international affairs, told creditors they had the opportunity to be part of a solution that would advance their own interests as well as Ukraine’s economic and geopolitical fortunes, urging them to move swiftly to reach an agreement that satisfies the IMF’s rescue plan criteria, including debt-sustainability targets.

One possible outcome is for the maturity date of the September bond to be pushed back, providing both sides with more time to reach a deal on the rest of the country’s outstanding stock of debt.

According to analysts at Bank of America Merrill Lynch, the risks of a hard default in Ukraine are high.

 “To restructure the September 23 eurobond without a hard default, in our view Ukraine would need an agreement with bondholders by the end of August or so,” said Vadim Khramov, Ukraine chief economist at BofA.

Prices for a $2.6bn bond issued by Ukraine and due for repayment in 2017 have dropped in the past three days as hopes for a deal recede, falling from 59 cents on the dollar to 56 cents.

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