Ukrainian debt restructuring: decision might be close
Ministry of Finance and creditors searching a face-saving compromise
At the beginning of the next week, fate of Ukrainian state debtwillbe decided. The next meeting of the Ministry of Finance with the Special Committee of creditors is to be held August 10-11. Well, there is the risk that it would be the final meeting. The gap of misunderstanding between Ukrainian side and its lenders is really immense. Lenders and the government have almost two months for bargaining though. The IMF memorandum, updated after the first review of the crediting program, postpones the deadline for the completion of negotiations on the $15.3 bln delinquent debts restructuring until the end of September. Preferably, it is necessary to find a compromise a bit earlier, until September 23, when the next $ 500 mln repayment of Eurobonds will be on time.
The golden ratio
Last week the investors enthusiastically wanted to discuss significant part of national debt forgiveness. The Special Committee, representing the largest group of lenders led by Franklin Templeton, agreed to cut off only 5% of the principal amount taking into consideration special economic conditions. The Ministry of Finance disagreed. According to the agreement with the IMF, Ukraine still has to fulfill three points. First, save $ 15.3 bln on payments on the foreign debt during four years. Second, to reduce the size of sovereign debt to 71% of GDP by 2020. Thirdly, decrease the interest costs on government loans to 10% of GDP in 2019-2025. In a response, Kyiv offered creditors some additional "cost recovery tools". These payments will be carried out in case of Ukraine's GDP growth. Tuesday, August 4 Ministry of Finance has sent a counter-proposal to creditors, details of which were not disclosed.
However, a compromise solution of the whole story neither is the same as investors have offered, nor it coincides with the suggestion of the Ministry of Finance. There is no urgent need to write off 40% of the principal amount of the debt. "Write-off has little to do with maintaining the solvency of Ukraine," states the head of analytical department of Concorde Capital Olexander Parashchiy. First of all, instead of writing off the debt the sides could negotiate about a longer postponement and coupon reduction. In terms of time value of money, these are the real alternatives, the expert believes. Creditors also considered this option. During the talks, they had previously offered to save $ 16 bln due to the complete rejection of the principal repayments until 2019.
The purpose of this write-off is to reach 71% debt-to-GDP ratio in 2020, instead of 80%. But it could be achieved not only by debt forgiveness, but by decrease of the denominator - GDP. Effective reforms and improving of the investment climate facilitates it. Without implementation of reforms, there might be no growth in 2016, as the IMF expects, and the real GDP growth of 4% in 2020 might not take place. In this case, even the write off will not help to achieve this aim. In fact, any common resolutions will solve the repayment problem, but the question is, for how long. Write-offs brings more confidence for tomorrow. 40% debt forgiveness actually gives a "safety cushion" in case of the reforms will be failed and a protracted recession or economic stagnation will take place. Small cut off will only force the reforms.
Wednesday, August 5, Bloomberg surveyed 14 analysts and holders of Ukrainian bonds. They believe that Ukraine, and creditors will make mutual concessions, and write off 22.5% of the national debt. UkrSybbank analysts believe that the two sides come together to write off between 10% and 20%. And, according to Parashchiy, there might be compromising 10%. Not because it would be the minimum sum necessary to avoid the default for a certain period, for example, next year. Simply this could be the outcome of "trading". So Ukraine "saves its face", proving the IMF its hard struggle for the restructuring.
IMF could write-off less than 40%. Neither memorandum, nor experts' report to the first or second tranche does not say about the specific amount of write-offs. "The IMF requires that the write-off just takes place as a fact. Formally, 1% is also a write-off. Everything else is the subject of trades," said Parashchiy.
The Ministry of Finance warned lenders that if next week a compromise is not found, the negotiations will be ceased temporarily. Taking into account the legal and time restrictions, if Ukraine fails to reach such an agreement at the state level at the beginning of next week, the country will be forced to use alternative mechanisms for financing IMF cooperation program, as emphasized the Ukrainian Ministry of Finance. This value reflects temporary moratorium on payment, in other words, an electoral technical default.
Nevertheless, will the government declare a moratorium and take such a risk? Participants of the market do not trust in such a possibility. According to the survey by Bloomberg, 10 out of 14 analysts and bondholders said that the likelihood of moratorium until September 23 is less than 50%. The Cabinet already had a chance to go on this way in late July, but it chose to pay creditors $ 120 mln. It was connected with significant progress in the negotiations, and with the reaction of the population on the probable technical default. For the average Ukrainian, there is no difference between temporal and selective default. People associate default with a new wave of devaluation and closing of banks. In July, threat of a moratorium on public debt payments caused boom in the currency black market. According to the Ukrsybbank analysts, on the background of hryvnia decline, the default can be dangerous for the Ukrainian ruling coalition that will face severe challenges in the upcoming local elections scheduled on October 25.
Oleksandra Petryk special for 112.ua
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