Ukraine said Thursday it had agreed in principle with its bondholders on a restructuring of some $18 billion in debts either issued or guaranteed by the sovereign, a key step to keeping alive its $17 billion bailout agreement with the International Monetary Fund.
However, it appeared no closer to getting any concessions out of Russia, which holds $3 billion of the $18 billion in the form of a single Eurobond issue.
Russian Finance Minister Anton Siluanov told state TV Thursday that Moscow still intends to insist on full repayment when that bond comes due for repayment in December, something that will be a huge strain on Ukraine’s finances, given that its economy is still shrinking after a year of undeclared war with its bigger neighbor. Gross domestic product fell 14.7% year-on-year in the second quarter.
Under the terms of a deal with the ‘Ad hoc Creditor Committee’, bondholders–including U.S. funds such as Franklin Templeton and T. Rowe Price–will exchange their bonds for new ones worth 20% less. The haircut is around half of what the Ukrainian government had been looking for, and will shave no more than $3.6 billion off the country’s sovereign debt load (a burden that Finance Minister Natalie Jaresko put at $72 billion in a conference call Thursday).
The new bonds will start to repay in 2019, after the current deal with the IMF is due to end. After 2019, the bonds will pay 7.75% interest plus a premium if real GDP grows faster than 3%. Jaresko said that creditors would vote on restructuring each of the 14 affected bonds separately, meaning that Russia won’t be able to block the restructuring of the other bonds if it doesn’t accept terms on the one it holds. She wouldn’t say whether the country would go through with an earlier threat to impose a moratorium on servicing unrestructured bonds.
“I don’t have any plans for failure,” Jaresko told the call.
Gabriel Sterne, an analyst with Oxford Analytics in London, says the uncertainties around Ukraine’s outlook are still far too great to say that its debt problems are fixed. He said the government could still need to seek further concessions from bondholders in future if the economy continues to deteriorate.
But the deal is a much-needed fig-leaf that gives the IMF cover to carry on financing a country precariously situated on a new front line between Russia and the West.
Although the Fund’s biggest shareholders in the U.S. and Europe are desperate not to let Ukraine’s economy collapse completely, they are also impatient with the lack of progress made by President Petro Poroshenko and his government in rooting out the corruption that has plagued it for decades, not to mention the distinct whiff of neo-Nazism evident in much of the volunteer forces fighting for Kyiv in eastern Ukraine.
IMF Managing Director Christine Lagarde welcomed the deal, saying: “The announced parameters of the agreement will help restore debt sustainability and–together with the authorities’ policy reform efforts–will substantively meet the objectives set under the IMF-supported program.”
The final documentation for the agreement is still being prepared.