Ukraine’s debt restructuring renegotiations with the international community risk becoming as hostile as those taking place in Greece, another economically throttled nation on the verge of default, fund managers and analysts have warned.
The war-torn former Soviet state, which remains locked in conflict with Russian-backed rebels, is saddled with debts of $23bn, of which $12.5bn, or around 20% of the country’s entire economic output, fall due by the end of 2016.
Yet hopes of restructuring its debt burden, or agreeing on terms with international creditors for a haircut on the full amount, dissolved this week into bitter recrimination.
Ukraine’s government on Wednesday released a statement blaming a committee representing bondholders for their “lack of willingness to engage in negotiations” and for failing to reveal the names of creditor members.
The committee issued a riposte from London, stressing its willingness “to support a prudent debt restructuring with Ukraine” and blaming the government and its advisers for failing to devise a feasible solution.
Despite a “disappointing” lack of progress, the committee said it had delivered a “detailed restructuring proposal” balancing Ukraine’s need to reduce its debt burden with investors’ fears of facing a full scalping rather than a light trim.
Dmytro Sologub, the deputy governor of the central bank, insisted the country needed to find a restructuring deal. “The key reason we need to restructure our debt is that the economic situation remains unstable, and without [restructuring] I cannot foresee Ukraine prospering in the near future.”
He acknowledged the country needed to remove capital controls but added: “I can’t offer precise timing but so long as the truce [in the east of the country] holds we might see controls become eased quite soon.”
German Chancellor Angela Merkel affirmed her support for the peace process at a meeting in Berlin with Ukraine’s president Petro Poroshenko on Wednesday.
Experts say there is little doubt creditors will need to accept a haircut on the sovereign Ukraine debt they hold — it just depends how much, and what form it takes.
Past restructuring deals have typically offered creditors a menu of choices, from a reduction to the bond principal to a cut in interest rates to maturity extensions. Ukraine, unusually, has asked for all of those, in order to free up $15bn over the next four years.
“I think there ultimately has to be a slight haircut,” Michael Ganske, head of emerging markets at Rogge Global Partners in London. “Otherwise the risk of outright default is too great. If that happens you can either go into fully fledged restructuring or take the vulture fund approach and try to get some assets, which Ukraine does not have.”
‘INVESTORS AREN’T STUPID’
Liza Ermolenko, emerging Europe economist at Capital Economics, said it was in “everyone’s interests with the exception of Russia to agree on a compromise. There is no way out bar a restructuring of Ukraine’s debts.”
Although the country’s finances have stabilised since the start of the year, with foreign exchange reserves at nearly $10bn, the months ahead will prove precarious and painful. Ukraine’s debt restructuring is part of a complex package that includes $17.5bn from the IMF and $7.5bn in bilateral assistance.
Experts say the problem is where one draws the line on restructuring. Ganske’s Rogge insisted private bondholders recognised the nature and state of the problem.
“Investors aren’t stupid,” he said. “They know Ukraine’s geopolitical importance as a proxy region in the standoff between the West and Russia and that this is no ordinary debt reprofiling.”
But this is a dangerous game to play, with the future and finances of a sovereign nation at stake. “Ukraine will become more like Greece,” said Tatiana Orlova, senior economist, Russia and CIS at RBS.
“Even if the IMF offers more financial assistance, that doesn’t remove the task facing [the] country. Whatever the solution is, it will only kick the can down the road a little longer and delay the pain.”