Em­bat­tled Ukraine fights for debt deal on fi­nan­cial front


As gov­ern­ment troops face off against pro-Rus­sian sep­a­ratists, Ukraine is also ma­neu­ver­ing on the fi­nan­cial front, scram­bling to stave off dis­as­ter by rene­go­ti­at­ing its for­eign debts.

Kiev’s pro-West­ern gov­ern­ment owes bil­lions of U.S. dol­lars to U.S. and Lon­don-based in­vestors, among oth­ers, as well as Rus­sia, its ri­val in the cur­rent con­flict that has pushed Ukraine’s re­ces­sion-hit econ­omy to the brink.

The In­ter­na­tional Mon­e­tary Fund has stepped in with a US$17.5 bil­lion (NT$537.63 bil­lion) res­cue loan. As part of that deal, Ukraine must save a fur­ther US$15 bil­lion over four years by re­struc­tur­ing its debts.

“If the debt op­er­a­tion fails, Ukraine will lose a big share of the pack­age,” said Kon­stantin Kucherenko, a fixed-in­come trader at Kiev-based in­vest­ment group Dragon Cap­i­tal.

“The funds that other mul­ti­lat­eral and bi­lat­eral donors pro­vide will not be suf­fi­cient to keep the Ukrainian econ­omy run­ning for the next four years,” he said.

The IMF has so far dished out US$5.0 bil­lion to Ukraine and must de­cide in June whether Kiev has met the terms for the next slice. With that dead­line loom­ing, Ukraine is try­ing to per­suade in­vestors to cut it some slack.

In­vestors Fear ‘hair­cuts’

Among Ukraine’s big­gest cred­i­tors are five U.S. in­vest­ment firms led by Cal­i­for­nia-based Franklin Tem­ple­ton. They risk a “hair­cut” — a po­ten­tial re­duc­tion in the pay­back on their prin­ci­pal in­vest­ment.

“The gov­ern­ment is aim­ing to fi­nal­ize ev­ery­thing by June. It’s not go­ing to be easy,” Kucherenko said.

“The ques­tion now is prin­ci­pal hair­cuts. The cred­i­tors are re­sist- ing, par­tic­u­larly the top five who hold a block­ing stake in the ne­go­ti­a­tions.”

Ukraine’s Fi­nance Min­is­ter Natalie Jaresko in Wash­ing­ton last week tried to pres­sure in­vestors to give ground, warn­ing they may face greater risks over the coun­try’s fu­ture if they do not.

“They’re mis­un­der­stand­ing ... the depth of the eco­nomic-fi­nan­cial dis­tress that the coun­try is in,” the Wall Street Jour­nal quoted her as say­ing.

Her min­istry said it “does not agree” with cer­tain counter-pro- pos­als by the five cred­i­tors, who hold US$10 bil­lion of Ukraine’s debt.

Dur­ing the talks, “we can ex­pect all kinds of dec­la­ra­tions, but those just should be seen as at­tempts to gain an ad­van­tage in the ne­go­ti­a­tions,” said one se­nior Ukrainian of­fi­cial who asked not to be named.

Debt to Rus­sia

Rus­sia mean­while holds a US$3.0 bil­lion bond due for re­demp­tion in De­cem­ber, which it is re­fus­ing to rene­go­ti­ate.

Rus­sia is not tak­ing part in the cur­rent debt talks, but an­a­lysts say its bond could be used to pres­sure Ukraine over its stand­off with proRus­sian sep­a­ratists in the east, the coun­try’s industrial heart­land.

“Most cred­i­tors and the IMF and EU will do what­ever they can to help Ukraine mud­dle through this, but Rus­sia is an­other story. It wants to be re­paid in full,” said Liza Er­molenko, an emerg­ing mar­kets econ­o­mist with Cap­i­tal Eco­nomics re­search group in Lon­don.

Jaresko said she hoped to reach an agree­ment with the other lenders by the time IMF in­spec­tors come to Kiev in late May. They will as­sess Ukraine’s progress in re­forms be­fore a June dead­line for ap­prov­ing the next tranche of the res­cue loan.

Among its re­forms, Kiev has set up a state anti-cor­rup­tion body and is clean­ing up the bank­ing sec­tor, crack­ing down on ir­reg­u­lar “in­sider” lend­ing by banks to their own ex­ec­u­tives.

Ukraini­ans are suf­fer­ing from soar­ing in­fla­tion and the weak­en­ing of their hryv­nia cur­rency, which has fallen by two-thirds against the U.S. dollar since early 2014.

Ukraine’s to­tal public debt was US$70 bil­lion in 2014, ac­cord­ing to the gov­ern­ment. Its pro­por­tion of public debt to gross do­mes­tic prod­uct is ex­pected to reach 94 per­cent this year, from 40 per­cent in pre-cri­sis 2013, ac­cord­ing to the IMF.

Rat­ings agen­cies Moody’s and Stan­dard & Poor’s have cut Ukraine’s credit score to their low­est rat­ings, one step above de­fault sta­tus.

Er­molenko said the ques­tion was now whether Ukraine would have an “or­derly” de­fault agreed with cred­i­tors, or a “dis­or­derly” one where it sim­ply stops pay­ing them.

“If the de­fault is dis­or­derly, Ukraine would be locked out of in­ter­na­tional fi­nan­cial mar­kets for some time, all of which would cause the re­ces­sion to be even longer,” she said.


A file photo taken on March 16, shows Ukrainian Fi­nance Min­is­ter Natalie Jaresko pos­ing prior to a meet­ing at the U.S. Trea­sury Depart­ment in Wash­ing­ton, DC.

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