IMF will still lend to Ukraine if private creditors go unpaid

By bne IntelliNews June 10, 2015

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The International Monetary Fund (IMF) says it will continue lending to Ukraine, even if the country fails to make payments to private creditors.

“We have a policy of lending into arrears which allows us to continue lending to a member state when it has arrears with private creditors, providing it’s fulfilling all its other commitments that it’s made to us,” IMF First Deputy Managing Director David Lipton said in Washington on June 9, as quoted by Bloomberg. “This is a way we can go forward.”

The IMF has required Ukraine to restructure $23bn in debts in order to receive further installments of a $17.5bn extended funding facility. But international bondholders have shown little willingness to accept a deduction in the principal, which the IMF believes is required in order to bring Ukrainian debt down to a sustainable level. 

Following the official's remarks, Ukraine’s $2.6bn of bonds maturing in July 2017 dropped 1.4 cents to 51.16 cents on the dollar after reaching a four-month high on June 8. Analysts predicted a further “cooling” of interest in Ukrainian sovereign bonds with the sudden strengthening of Kyiv's hand in the restructuring issue.    

“Such a comment from a top IMF official adds some bargaining power to the Ukrainian government in its talks on restructuring $23bn in state and quasi-sovereign debt owed to private lenders,” said Alexander Paraschiy of the Kyiv-based Concorde Capital investment bank. 

Another boost after weeks of wrangling with the creditors came with the adoption on May 19 of a law granting the government the authority to avoid servicing some of the debt in question. “With Lipton’s statement, the Ukrainian government seems to have received a green light from the IMF to use a repayment moratorium on certain debt instruments as an argument in its negotiations,” Paraschiy added.

Compounding the uncertainty, Ukraine has had to send out a written appeal to anonymous holders of the Eurobonds to identify themselves as the country approaches a mid-June deadline to restructure the debt. This was supposedly essential for the disbursement of further IMF money until Lipton's comments cast doubts on the necessity.

Kyiv is hoping to receive more than $2bn from the Fund in June following payment of an initial $5bn tranche in March. Both sums are part of the agreed $17.5bn aid package to be spread over four years. Meanwhile, in an interview with Ukrainian media on June 6, Finance Minister Natalie Jaresko argued that a sovereign default would not greatly impact on Ukraine anyway.

“There is no reason to be afraid of a default... The negative effect of a default will only be felt by commercial firms who currently operate normally and can access external capital markets... But there are very few such companies in Ukraine,” she said. “To be honest, it will have no effect on the Ukrainian people.” Underscoring its hard line on the restructuring, the finance ministry called the bondholders' proposals "unacceptable" after a telephone call on June 5 with the committee of bondholders led by US asset manager Franklin Templeton.

Jaresko and Ukrainian Prime Minister Arseny Yatsenyuk are currently visiting Washington DC for talks with IMF and US officials before the Fund's review of the requirements for the continued aid package in mid-June.

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