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| Ukraine and Top Creditors Agree to Restructure $18 Billion in Foreign Debt | |
| (about 2 hours later) | |
| 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. | 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 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. | 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. |
| 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. | 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. |
| 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 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. |
| 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. | 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. |
| “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.” | “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.” |
| “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.” | “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.” |
| 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. | 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. |
| 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. | 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. |
| 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. | 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. |
| 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. | 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. |
| 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. | 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. |
| 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. | 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. |
| Under a concession, the government will pay the creditors bonuses under a value recovery instrument, if Ukraine’s economy bounces back faster than expected. | Under a concession, the government will pay the creditors bonuses under a value recovery instrument, if Ukraine’s economy bounces back faster than expected. |
| 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. | 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 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 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. |
| “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. | 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. | 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. | 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. | 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. | 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. | 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. | 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. |