Ukraine begins debt restructuring talks after IMF approves new loan

By bne IntelliNews March 13, 2015

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Ukraine's government will start talks with its creditors on restructuring the country's debt immediately, following the confirmation of the IMF's approval of its $17.5bn loan, according to Finance Minister Natalie Jaresko.

Ukraine is expected to receive an up-front tranche of $5bn in the next few days, but the success of the IMF bailout depends largely on a speedy and positive conclusion of those restructuring talks, firm progress on reforms by the Ukrainian government, and maintaining the ceasefire with pro-Russian rebels, the IMF noted.

"The program faces exceptionally high risks," the IMF said in an extensive analysis of the economy and the prospects of the programme released on March 13.

Apart from worries over the renewal of fighting, the fund said the debt talks themselves may not be easy. Ukraine should complete the debt restructuring by June to ensure the new bailout operation can stabilise the country's finances and help restore economic growth next year, the IMF said.

Meanwhile, it forecasts that Ukraine's debt-to-GDP ratio will reach 94% in 2015, from 72% at the end of 2014 and 41% the prior year. However it is expected to decline to 71% by 2020.

Speaking at a briefing in Kyiv on March 12, Jaresko said Ukraine would begin consultations with creditors with the goal of "easing pressure" on the budget and saving $15bn over the next four years. "We will listen to their point of view over several weeks," she said. "We have to find solutions ... I hope we find a solution within two months" to meet the June deadline set by the IMF. Asked about the $3bn of Russian money among the debt, Jaresko said that Kyiv "does not distinguish between nationalities" of its creditors and would consult with everyone.

The finance minister did not provide any details as to which debt she wanted to renegotiate terms of, but analysts believe the move would likely target bondholders.

"As far as I understand the finance ministry will enter negotiations with private creditors," Oleksandr Valchyshen, chief economist at Investment Capital Ukraine, told AFP.

Ukraine's debt is made up mainly of $17bn in bonds. In addition to Russia's $3bn in Eurobonds, up to $8bn is reportedly owned by Franklin Templeton, a US investment firm. 

The National Bank of Ukraine said on March 2 that the country’s sovereign and sub-sovereign debt reached 71.5% of GDP at the end of 2014, effectively breaking the terms of the Eurobonds sold to Moscow in December 2013. This was the first time Kyiv has officially admitted exceeding the 60% limit that Moscow set on Ukraine’s debt-to-GDP ratio.

Russia has previously said that it regards Ukraine as being in breach of the bond covenant. However, Russian Finance Minister Anton Siluanov has indicated that Russia does not intend to exercise the right to early redemption.

Whether it does so or not will become clear in the near future. "It remains to be seen whether Russia would agree [to a restructuring]," Valchyshen said to AFP. "Probably they would try to block it."

Ukraine's plight regarding the bonds is reminiscent of the situation in Russia in September 2008, some analysts have noted, when after a sharp devaluation it “technically defaulted” on its Eurobonds and actually extended payments by five years. It is regarded as likely that Jaresko is considering doing the same, allowing Ukraine to claim it did not “technically default”, thus preserving its cash-flow, which is now the top priority.

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