No-one likes failure. Institutions and individuals alike try to avoid any hint of it at all costs. This is understandable. It is human. It is also wrong. Our inability to admit that something is not working, has not worked and is unlikely to ever work has been the source of much human unhappiness.
The collective attempt to keep Ukraine financially viable now falls into this category. The money is not there. Only $14bn of the $17bn IMF programme funds have been disbursed. But even assuming that the rest of the funds are forthcoming, the best estimates are that the country needs another $15bn to meet its short-term debt obligations.
The combined efforts of the IMF, EU, US and other bilateral donors provide no confidence that another $15bn can be raised. The market knows it. Ukraine’s 2015 Eurobonds are trading with a cash price below 70, its 2017 Eurobonds with a cash price below 60. The longer the world continues to drip feed Ukraine money to pay private creditors, the longer it will take to return the country to some version of financial sustainability.
Restructuring is going to feel like failure for Ukraine, for the West and for the IMF. But the damaged pride of these three parties isn’t a good enough reason to keeping watching the slow motion car crash that is the Ukrainian economy. The country is still paying private creditors while living standards plummet. It shouldn’t be. The top five holders of Ukraine’s 6.875% 2015 Eurobonds, for instance, are all Western asset managers and account for over 30% of all outstanding paper.
Another reason countries like to avoid default is that defaults are typically complex and drawn-out affairs. But staying on the current road doesn’t look likely to be any less complex or drawn-out.
Perhaps we should worry about the banks, some of whom are holding the Eurobonds that Ukraine would restructure. But the volume of Eurobonds held by Ukrainian banks is not particularly large, and concerns that the restructuring could trigger some kind of banking collapse overlooks the fact that the banking system is already collapsing. The country does not have a functioning banking sector to break.
Sovereign default does hurt market access. But Ukraine does not have market access now and is unlikely to have it in the near future.
If it was to restructure with the help of the IMF and EU how long would it have to wait? Ecuador returned to market in 2014 with a $2bn 10 year note, five years after defaulting on $3.2bn worth of debt. Greece only had to wait two years after it underwent the largest sovereign debt restructuring in history in 2012.
Restructuring the $19bn or so of Ukrainian Eurobonds outstanding would be a small but significant step in helping Ukraine stay solvent. It is worth taking. It would show the market that the international community has a realistic approach to dealing with Ukraine’s finances. And it would be humane to ask private creditors to share a fraction of the pain that Ukraine is experiencing.