Ukraine's leaders brace nation for final credit showdown

By bne IntelliNews June 26, 2015

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Ukrainian Finance Minister Natalie Jaresko appeared to prepare the nation for a possible sovereign default in an address to citizens posted on her ministry's website on June 26.

"The government is ready to use its existing legal right to cease payments to international external creditors in order to protect Ukraine's economy and preserve its financial resources until an acceptable agreement with creditors has been reached," Jaresko said.

"In this way, the goal of our government is to protect the Ukrainian people and we are ready to do everything necessary to protect Ukraine's interests," the address continued.  "The weight of our current economic and financial situation cannot rest exclusively on the Ukrainian people, who have already paid a high price for a European future," she added.
The comments reinforced predictions that Ukraine will default if its private creditors do not accept a 40% debt, or haircut, on billions of dollars owed by the state. 

The statement of the US-born minister followed a forecast by global investment banker Goldman Sachs two days earlier that Ukraine will not reach any agreement with its creditors before it has to pay a $120mn coupon payment on July 24, on a $2.6bn bond due for redemption in July 2017. 

"Ukraine will not make the July 24 coupon payment and, as a result, will enter into default at that point," the analysis reads. "We do not expect the ad hoc committee [of creditors] to accept Ukraine's latest restructuring proposal," the report added, as quoted by Bloomberg.

Other voices in the leadership also indicated that the government was ready to take the credit standoff right down to the wire. "We cannot now afford to service the debts which were accumulated mainly for the last three years," Prime Minister Arseny Yatsenyuk told a June 25 meeting of government officials and members of the American Chamber of Commerce in Ukraine and the European Business Association.

Dead end talks

Jaresko, who previously accused private creditors of having supported the "dictatorial regime" of ousted ex-president Viktor Yanukovych, said their proposal for Ukraine to pay debts from its international reserves meant they would avoid any losses, while foreign states and the IMF had made a contribution to Ukraine's recovery. She also made it clear that paying credits from the reserves would violate Ukrainian law.

"Despite the difficulty of our situation, for three months now they [the creditors] have refused to conduct constructive talks on the conditions of the debt operation along the three core indicators laid down by the IMF and which it is necessary to achieve so that Ukraine's debt burden is not excessive," the minister said her "appeal to citizens".
Jaresko said the "government understands that the creditors may not be aiming at reaching any agreement, but instead would continue to block any resolution of the question".

Ukraine's position was supported by the IMF and the G7, who agreed that commercial creditors should participate in the restoration of Ukraine's economy, she said. The IMF has previously said it would continue lending to Ukraine in the event of a default on its commercial debt.

No dice, say creditors

The committee of private creditors immediately refuted Jaresko's charge that they "refused to contribute to Ukraine" and again asked for negotiations to be held urgently," the committee said in a statement. The creditors said that since May 9 Ukraine's Finance Ministry had been acquainted with a comprehensive restructuring proposal meeting all criteria laid down by the IMF and providing nearly $16bn of debt relief for Ukraine.

The group also argued that their proposal would mean they would contribute more support to Ukraine than the IMF, since the private bondholders would not receive any repayment of principal before 2019, while the IMF would get $4.4bn between 2015 and 2018, and $8.1bn by 2020.

Key meeting

Ukraine, the IMF and the creditors are slated to have a trilateral meeting on June 30 to attempt to reach an agreement. Jaresko said on June 25 that she would not attend the meeting because it was "technical". The creditors in turn demanded her participation so that talks could "start as soon as possible, without preconditions and with an emphasis on solutions".

"The scheduled trilateral meeting in Washington is very likely to be the deciding moment on the Ukrainian government's debt operation," analyst Aleksandr Paraschiy of Kyiv brokerage Concorde Capital wrote in a research note. "We expect the creditors will try to persuade the IMF that Ukraine cannot qualify for the IMF’s 'lending into arrears' policy, meaning that the IMF cannot continue to cooperate with Ukraine if it announces a moratorium on private debt repayment,” Paraschiy said. For instance, they "insist that the Ukrainian government is not 'pursuing appropriate policies and making a good faith effort to reach a collaborative agreement with its creditors,' which is a necessary condition to qualify for the policy".

There was no doubt about the IMF’s support, as the the investment bank consider the Ukrainian government had consistently acted in strict accordance to IMF instructions, Paraschiy added. "That said, we believe the creditors will be aware of a high possibility of the moratorium being imposed and, therefore, Ukraine will have no need to introduce it."

Bond and Russian roulette

Jaresko did not mention in her address the ongoing intrigue as to whether $3bn of Ukrainian bonds bought by Russia in 2013 as part of an abortive bailout should count as commercial or official debt. Previous newswire reports had quoted IMF sources saying they regarded the bonds as official debt, meaning any Ukrainian default would bar Ukraine from receiving further funding.

But Jaresko on June 25 denied that this was the case. "There was no such decision, this was Bloomberg or Reuters or someone from some anonymous sources. There is no such decision. Look at the official website of the IMF and at the quotes for the head of the IMF, for the deputy head of the IMF on this issue a month ago. Nothing has changed," Jaresko said as quoted by Interfax.

Adding to the confusion, the IMF's Gerry Rise was simultaneously reported by Interfax Ukraine to have denied at a press conference that the fund regarded the Russian-held Eurobonds as official. However, other journalists present said he did not deny this. "That's not what I heard, I heard him dodge the question," tweeted Financial Times journalist Shawn Donnan.

"In our view, it is very unlikely that the IMF board will recognise this bond as state debt," writes Concorde Capital's Paraschiy. "Firstly, the board has already implicitly recognized this debt as private by allowing it to be included in the debt operation (...) and it's unlikely to change its position. Secondly, the board should clearly understand that by changing its position, it will undermine the entire debt operation process, so that even its first and the easiest target - the prolongation of the maturity of the $15.2bn debt, including the $3bn 'Russian' bond - will become impossible," he added.

"The Russian bond has been controversial since its inception in December 2013 and is likely to continue to be so," wrote analysts at brokerage ICU.

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