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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
(about 5 hours later)
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. Ukraine and its main creditors agreed on Thursday 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. The committee of creditors backing the proposal represents holders of about half the debt. If the deal is approved by the Parliament of Ukraine, it would write off 20 percent of the nation’s foreign debt, helping to avoid a drawn-out, Greek-style negotiation with large bondholders. The terms would also offer financial relief to Ukraine during a deep recession and an armed conflict with pro-Russia separatists.
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. But it leaves unanswered whether lenders not represented in the negotiating committee — including, critically, Russia — would comply with the deal. The committee of creditors backing the proposal represents holders of about half of the debt.
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 California-based Franklin Templeton fund, Ukraine’s largest lender, would accept an immediate loss on the principal. The deal would allow Ukraine to delay repayments for four years, though interest rates would rise slightly. The creditors might recoup some losses after 2021 if the country’s economy returns to growth faster than expected.
Under the proposal, bondholders including the giant California-based Franklin Templeton fund — Ukraine’s largest lender — would accept an immediate loss on the principal. In only three other instances in the last 15 years did creditors agree to reduce principal amounts without a country heading first into default, according to Ukraine’s minister of finance, Natalie A. Jaresko. The previous cases involved Greece, the small Central American nation Belize, and St. Kitts and Nevis, in the Caribbean.
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. “It’s a benchmark for emerging markets” that might serve as a template for other countries bogged down by debt, Ms. Jaresko said on Thursday in a telephone interview. “It is every sovereign’s dream.”
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. “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,” she said, adding that a country can end up “working with creditors” and “not on opposite sides of the table.”
The other two cases involved the small Central American nation Belize, and St. Kitts and Nevis, in the Caribbean. Big bond investors, like Michael Hasenstab at Franklin Templeton, poured money into Ukraine before President Viktor F. Yanukovych was ousted last year. The Yanukovych government had lobbied Franklin Templeton to hold its bonds, sending a first deputy prime minister to the fund’s offices in San Mateo, Calif., even as Ukraine’s foreign policy swiveled away from the West toward Russia and the economy started to skid.
“It’s a benchmark for emerging markets” that might serve as a template for other countries bogged down in debt, Ms. Jaresko said. Although the economy was stumbling, some investors argued they would win regardless of the geopolitical outcome, because either the International Monetary Fund or Russia could be expected to bail them out with public sector aid to Ukraine.
“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.” After the power change, the cash-poor Ukraine started pushing for debt relief. The government asked for an immediate 40 percent reduction and threatened to default. Officials in Kiev, the capital, had been hinting strongly that the creditors should accept the loss given the glaring signs of corruption in the government of Mr. Yanukovych, who kept a private zoo and golf course at his residence.
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. The Ukrainian officials argued that an initial bailout might not have worked, if bondholders had held out. If that had happened, Ukraine faced being back at the table with creditors again and again — much like Greece.
Besides its debt woes, Ukraine is also plagued by high inflation. But on Thursday, after the government announced the debt-reduction agreement, the Ukrainian central bank said it would cut its key interest rate by 3 percentage points, to 27 percent. But big investors initially resisted, arguing instead for extending the repayment period. They figured Ukraine’s economy would recover quickly enough to make the payments by dipping into gold and foreign currency reserves.
The central bank had raised the rate significantly in March, bumping it up from 19.5 percent, in an attempt to curb the country’s runaway inflation, which had been made worse by a decline in the value of the currency, the hryvnia. Eventually, they compromised, agreeing to a 20 percent loss. Franklin Templeton’s bonds, once worth $7 billion, are now worth roughly $4.6 billion. Franklin Templeton declined to comment.
The inflation rate peaked at 60 percent in April, and was still at 55 percent in July. On Thursday, though, the central bank said the time had come to move toward a more normal monetary policy. Under a concession, the government will pay the creditors bonuses under a value recovery instrument, if Ukraine’s economy bounces back faster than expected.
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. If gross domestic product rises faster than 3 percent after 2021, for example, Ukraine must pay creditors part of the total value of the economic growth. It would be based on a sliding scale from 15 percent to 40 percent, depending on how quickly things pick up.
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 deal also helps Ukraine meet a requirement of the International Monetary Fund to save $15.3 billion by reducing payments to commercial creditors over four years. Ukraine had to do so as a condition of receiving $34.7 billion in I.M.F. loans and aid from the United States and other Western nations.
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 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.
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.
“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.”
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 participate.
That could be complicated, given that Russia is a major creditor.
Russia is unlikely to be swayed by the Ukrainian government’s arguments to lenders that the agreement would free money for the military to fight the separatists in the east of the country. A protracted legal dispute could ensue.
Anton G. Siluanov, the Russian finance minister, said on Thursday that he expected Ukraine to repay its debt to Russia in full.
And the deal hardly solves Ukraine’s broader economic problems. Besides its debt, Ukraine is plagued by high inflation. The inflation rate peaked at 60 percent in April and was still at 55 percent in July.
The central bank raised an important interest rate significantly in March, in an attempt to curb inflation, which had been made worse by a decline in the value of the currency, the hryvnia.
But the situation is showing signs of stabilizing. On Thursday, after the government announced the debt-reduction agreement, it cut the rate by 3 percentage points, to 27 percent.