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Ukraine Agrees on Plan to Restructure $18 Billion of Foreign Debt Ukraine Agrees on Plan to Restructure $18 Billion of Foreign Debt
(34 minutes later)
Ukraine and its main creditors on Thursday agreed on a plan to restructure $18 billion of the country’s foreign debt in a rare deal between bond funds and a wobbly, emerging-market government. Ukraine and its main creditors agreed on Thursday on a plan to restructure $18 billion of the country’s foreign debt in a rare deal between bond funds and a wobbly, emerging-market government.
If the agreement goes into effect, it would write off 20 percent of the country’s foreign debt, and go far to help Ukraine avoid a drawn-out, Greek-style negotiation with large bondholders. But it leaves unanswered whether lenders not represented in the negotiating committee — including, critically, Russia — would go along with the deal. If the agreement goes into effect, it would write off 20 percent of the country’s foreign debt and go far to help Ukraine avoid a drawn-out, Greek-style negotiation with large bondholders. But it leaves unanswered whether lenders not represented in the negotiating committee — including, critically, Russia — would go along with the deal. The committee of creditors backing the proposal represents holders of about half the debt.
The terms would help to keep Ukraine afloat financially amid deep recession and armed conflict with pro-Russia separatists, and was “historic for being collaborative,” with the big bond funds, the minister of finance, Natalie A. Jaresko, said on Thursday in a telephone interview. The terms would help to keep Ukraine afloat financially amid deep recession and armed conflict with pro-Russia separatists, and the accord was “historic for being collaborative” with the big bond funds, the minister of finance, Natalie A. Jaresko, said on Thursday in a telephone interview.
Under the proposal, bondholders including the giant California-based Franklin Templeton fund — Kiev’s largest lender — would accept an immediate loss on the principal. A spokeswoman for the Russian Ministry of Finance told the news agency Interfax that she could not comment on the restructuring plan because the ministry had not yet received it.
Under the proposal, bondholders including the giant California-based Franklin Templeton fund — Ukraine’s largest lender — would accept an immediate loss on the principal.
The pact would also allow Ukraine to delay repayments for four years, though interest rates would rise slightly and the creditors might recoup some losses after 2021 if the country’s economy returns to growth faster than expected.The pact would also allow Ukraine to delay repayments for four years, though interest rates would rise slightly and the creditors might recoup some losses after 2021 if the country’s economy returns to growth faster than expected.
In only three other instances in the past 15 years, including in Greece, she said, did creditors agree to reduce principal amounts without a country heading first into default. In only three other instances in the past 15 years, including in Greece, Ms. Jaresko said, did creditors agree to reduce principal amounts without a country heading first into default.
The other two cases involved the small Central American nation Belize, and St. Kitts and Nevis, in the Caribbean.The other two cases involved the small Central American nation Belize, and St. Kitts and Nevis, in the Caribbean.
“It’s a benchmark for emerging markets,” that might serve as a template for other countries bogged down in debt, Ms. Jaresko said. “I would hope that it shows that you don’t need to rush into a default, even having the willingness to use a moratorium if needed, but you can end up not on opposite sides of the table with creditors, but working with creditors. It is every sovereign’s dream.” “It’s a benchmark for emerging markets” that might serve as a template for other countries bogged down in debt, Ms. Jaresko said.
Still, Russia is unlikely to be swayed by the Ukrainian government’s arguments to lenders that the agreement will free up funds for the military to fight the separatists in the east of the country. A protracted legal dispute could ensue. “I would hope that it shows that you don’t need to rush into a default, even having the willingness to use a moratorium if needed, but you can end up not on opposite sides of the table with creditors, but working with creditors,” she said. “It is every sovereign’s dream.”
Western donor countries are propping up the Kiev government financially; Ukrainian officials had argued that they should not be spending that money to pay off bond funds while there is a battle going on with the rebels. Still, Russia is unlikely to be swayed by the Ukrainian government’s arguments to lenders that the agreement would free up funds for the military to fight the separatists in the east of the country. A protracted legal dispute could ensue.
Western donor countries are propping up the Ukrainian government financially; officials in Ukraine have argued that Kiev should not be spending that money to pay off bond funds while there is a battle going on with the rebels.
The International Monetary Fund had largely backed up Ukraine’s demands that creditors accept losses. The fund said on Thursday in a statement that the proposed deal met its requirement that Ukraine save $15.3 billion by reducing payments to commercial creditors over four years.The International Monetary Fund had largely backed up Ukraine’s demands that creditors accept losses. The fund said on Thursday in a statement that the proposed deal met its requirement that Ukraine save $15.3 billion by reducing payments to commercial creditors over four years.
The agreement would “provide the targeted external debt service relief, reduce annual gross financing needs essentially as envisaged under the program,’’ the I.M.F. said, “and place public debt on a clearly downward path.” The agreement would “provide the targeted external debt service relief, reduce annual gross financing needs essentially as envisaged under the program and place public debt on a clearly downward path,” the I.M.F. said.
The Ukrainian Parliament must vote on the deal and, if it is approved, creditors not represented in the committee would have to decide whether to sign up.
The bond funds had resisted writing off part of the debt, arguing instead for extending the repayment period. In their analysis, Ukraine’s economy would recover quickly enough to make the payments by dipping into gold and foreign currency reserves.The bond funds had resisted writing off part of the debt, arguing instead for extending the repayment period. In their analysis, Ukraine’s economy would recover quickly enough to make the payments by dipping into gold and foreign currency reserves.
The government had asked for an immediate 40 percent reduction and threatened to default.The government had asked for an immediate 40 percent reduction and threatened to default.
If bondholders had held out, the Ukrainian officials said, an initial bailout might not have worked, and Ukraine faced being back at the table with creditors again and again — much like the situation in Greece.If bondholders had held out, the Ukrainian officials said, an initial bailout might not have worked, and Ukraine faced being back at the table with creditors again and again — much like the situation in Greece.
Under Thursday’s deal, if Ukraine’s economy bounces back faster than expected, the government will pay the creditors bonuses under a so-called value recovery instrument, a concession to their argument that the country’s outlook may not be so bleak after all.Under Thursday’s deal, if Ukraine’s economy bounces back faster than expected, the government will pay the creditors bonuses under a so-called value recovery instrument, a concession to their argument that the country’s outlook may not be so bleak after all.
If gross domestic product rises faster than 3 percent after 2021, for example, Ukraine must pay creditors a portion of the total value of the economic growth, on a sliding scale from 15 percent to 40 percent depending on how quickly things pick up.If gross domestic product rises faster than 3 percent after 2021, for example, Ukraine must pay creditors a portion of the total value of the economic growth, on a sliding scale from 15 percent to 40 percent depending on how quickly things pick up.
“Less of the government’s scarce financial resources will be spent servicing high debt levels taken on by previous governments,” Ukraine’s ministry of finance said in a statement. “And more will be available for critical social spending and national defense.” “Less of the government’s scarce financial resources will be spent servicing high debt levels taken on by previous governments,” Ukraine’s Ministry of Finance said in a statement. “And more will be available for critical social spending and national defense.”