As Ukrainian negotiators and private bondholders continue talks, both sides have a growing incentive to reach a compromise. Ukraine’s economy, which has continued to suffer in wake of negotiations, hinges on a decision regarding the future of its debts.
A group of Ukraine’s key creditors will meet with the country’s Finance Minister, Natalie Jaresko (pictured at right), in Washington on July 15 in an attempt to come to an agreement regarding Ukraine’s debt. A deal with its creditors is a prerequisite for Ukraine gaining access to its next tranche of funding from the International Monetary Fund (IMF).
Disbursement of the $1.7 billion tranche has already been delayed as negotiations stalled over the past months, with creditors and Ukrainian officials engaging in stormy public exchanges.
Nevertheless, with several debt repayments scheduled for the fall, pressure is growing for Ukrainian policymakers to come to an agreement. At the same time, the threat of further destabilizing Ukraine’s struggling economy is pushing creditors to begin considering greater concessions.
Ukraine seeks debt haircut and further funding
In March, the IMF approved a $17.5 billion, four-year Extended Fund Facility Arrangement for Ukraine.
In addition to a range of reforms and policy adjustment—including energy sector reforms and exchange rate flexibility—the IMF envisioned a so-called debt operation, thus requiring Ukraine to restructure its debts and save $15.3 billion over the next four years.
Ukraine’s Ministry of Finance has argued in favor of significant debt reduction, maturity extensions, and a coupon structure that ensures the country can meet the IMF’s demands while also retaining a debt burden that is sustainable.
Sources in Ukraine’s Finance Ministry claimed the country needs a 40% haircut on its debts in order to meet IMF requirements. In fact, the Ukrainian negotiators rejected a proposal from the country’s creditors which would have reportedly required Ukraine’s National Bank to use $8 billion of its reserves to pay off sovereign debt. As of the end of June, Ukraine’s international reserves stood at about $10.2 billion.
Ukraine’s economy continues to suffer
Ukraine’s creditors are in a strong negotiating position, but Ukraine’s poor economic outlook is pressuring firms such as Franklin Templeton to consider softening their negotiating stance.
Ukraine’s economy is now projected to shrink by 9% in 2015 alone, with inflation expected to exceed 40%. These projections are more pessimistic than those presented just a few months ago. Private funds that have invested in Ukraine want their money back, but at the same time also have an interest in helping Ukraine avoid default and protecting what remains of their investments.
At the same time, Ukraine’s leadership is under heavy pressure to come to an agreement as soon as possible: the country needs the next tranche of its IMF package. Moreover, Ukraine has several large repayments scheduled for the coming months. $500 million of Eurobonds matures in September, while a 600 million euro bond is due in October.
As talks continue, some Ukrainians believe that the uncertainty surrounding the debt negotiations is in itself highly harmful for the country’s economic prospects. The head of Kiev’s stock exchange, Oleg Tkachenko, said in interview with Bloomberg that “any development is better than the suspended state.” Tkachenko’s concern stems from the reality that Ukraine’s ability to attract foreign investment hinges on a decision regarding the future of its debts.
As Ukrainian negotiations and private bondholders continue negotiating, both sides have a growing incentive to reach a compromise. A deal regarding the status of Ukraine’s debt is thus likely in the near term.
