Soros attacks any bail-in for Ukraine bondholders

By bne IntelliNews October 24, 2014

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Currency trader George Soros says that international donors to Ukraine are pressuring holders of Ukrainian sovereign debt to accept a haircut on their debt, as a precondition for further donor funding of Ukraine.

According to Soros, writing in a forthcoming  article in the New York Review of Books, international donors - such as the European Union and International Monetary Fund - want "bondholders to take losses on their investments as a precondition for further official assistance to Ukraine that would put more taxpayers' money at risk".

Soros called such bail-in plan an "egregious error", fingering German chancellor Angela Merkel as its main proponent, after Germany's support for such measures during the Greece and Cyprus debt crises of 2011-2013.

"Germany, as the main advocate of fiscal austerity, needs to understand the internal contradiction involved," Soros wrote, "Bailing in private creditors would save very little money and it would make Ukraine entirely dependent on the official donors," he adds.

"The Ukrainian government strenuously opposes the proposal because it would put Ukraine into a technical default that would make it practically impossible for the private sector to refinance its debt," writes Soros.

Instead of a bail-in, Soros calls for massive external financing of Ukraine to save the country from bankruptcy and collapse, including "an immediate cash injection of at least $20bn, with a promise of more when needed", following parliamentary elections on October 26.

Soros called for Ukraine's partners to provide additional financing for Ukraine, conditional on its implementation of the IMF-supported program.

According to Soros, $4bn is needed to cover Ukraine's gas debts to Russia, $2bn for payments for gas, $2bn to repairing coal mines in eastern Ukraine that remain under the control of Kyiv, with the rest to boost the currency reserves of the National Bank of Ukraine.

The new assistance package proposed by Soros would include a debt exchange of Ukraine's Eurobonds into "long-term, less risky bonds" to "lighten Ukraine's debt burden and bring down its risk premium". 

This would not qualify as a default, because bondholders would volunteer to accept the lower interest rate and longer redemption period in return for - critically - the new long-term bonds being partly guaranteed by the US or Europe.

Ukraine has $18bn of outstanding Eurobonds, of which $7.6bn are held by Franklin Templeton.

According to Soros, such a plan would reduce government debt service payments in the immediate future, thus reduce the likelihood of a sovereign default, and making it possible to recapitalise banks. "The banks desperately need bigger capital cushions if Ukraine is to avoid a full-blown banking crisis, but shareholders know that a debt crisis could cause a banking crisis that wipes out their equity."

Soros also called for Ukrainian households to pay full market prices for their gas, but for the installation of meters to regulate household consumption and encourage more efficient usage, while subsidies are disbursed to needy households.

Ukraine's deputy prime minister Volodymyr Hroisman said on October 24 that the country could collect "tens of billions of dollars" at a planned upcoming donors' conference, according to Interfax.


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