UKRAINE’S economy, racked by war, is in free fall. In the second quarter
of this year its GDP shrunk at an annualised rate of 15%, after shrinking by
18% in the first. Its public debt is probably worth 100% of its GDP. Small
wonder, then, that Ukraine wants to cut some of the debt it owes. After months
of bitter negotiations, Ukraine and its creditors may reach a deal this week.
On what issues do Ukraine and its creditors disagree, and what is likely to
happen?
Debt negotiations have been drawn out. For months, no one—not even
Ukraine’s finance minister, Natalie Jaresko—was entirely sure who owned
Ukraine’s debt. It is now known to include Franklin Templeton, a big asset manager, which owns about $9 billion of
Ukraine’s bonds, and BTG Pactual, a Brazilian firm. From the start everyone has
recognised that Ukraine needed some debt relief. The big question was the form
that such relief might take. For months the creditors argued that Ukraine’s
problems would be solved by “maturity extensions”—that is, pushing out the date
when bonds needed to be repaid.
But this suggestion does not work, since it conflicts with the demands laid down by the International Monetary Fund. The IMF has kept Ukraine
alive with a series of loans, worth about $7 billion in total since last year.
The IMF provided the money under the assumption that the government in Kiev will write off $15.3 billion of debt
and interest by 2018, and that it will have reduced its public-debt-to-GDP
ratio to about 70% of GDP by 2020. The goal is to reduce debt repayments in any
given year to no more than 10% of GDP. All this means that Ukraine does not
just need maturity extensions, but reductions in the total amount of outstanding
debt. Ukraine’s government wants a 40% reduction in the total amount of debt it
owes. More recently, its creditors have suggested a much smaller haircut—of
just 5%, according to some reports.
Ukraine may soon reach a deal with its creditors. If it is does not,
then it may declare that it will not meet future bond repayments (including one
for $500m on September 23rd). But even if a deal is reached, Ukraine’s finances
will be in dire shape. One creditor has not taken part in any negotiations—and
that creditor owns a $3 billion bond that matures in December. There is a
bizarre clause in that particular bond, which allows its holder to force
Ukraine to default at any time after its public debt load has passed 60%
of GDP. That
creditor, unfortunately, is Russia.
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