Ukraine finally agrees debt restructuring

After five months of negotiations and no shortgage of brinkmanship on both sides, Ukraine has finally secured a refinancing deal to cut the burden of its debt pile. The question now is, are the cuts enough?

The Financial Times reports that under the agreement with a consortium of private bondholders, led by fund manager Franklin Templeton, the face value of its outstanding debts will be cut by 20 per cent. That is less than the 40 per cent relief initially sought by the IMF as a condition of its ongoing funding support, but its managing director Christine Lagarde said a deal that also includes a suspension of repayments for four years "substantively" meets its objectives.

There are stumbling blocks, however. The Guardian says there may be "dismay" among Ukranian lawmakers that the package also includes sweeteners for bondholders, including securities promising GDP growth-linked payouts between 2021 and 2040 and "a higher interest rate" on the 80 per cent of the debt pile that remains.

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It also points out that Russia, to which Ukraine is due to repay a $3bn bond in December, has refused to take part in the refinancing. This"represents a dilemma for the IMF as it considers whether to pump further funds into Ukraine… [as] it not officially allowed to continue lending to a country that is in default to another sovereign".

Ukraine's finance minister, Natalia Yaresko, said the deal "meets all targets set by the IMF bailout programme". She described the agreement as "collaborative" and "not one side winning… a win-win situation".

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Others, however, are less convinced. Some analysts point to a surge in the secondary value of Ukrainian bonds as evidence that the market considers the bondholders to have won the lion's share of concessions – and that the cuts do not go far enough to ensure the country's debt remains sustainable in the longer term.

Gabriel Sterne, head of global macro at Oxford Economics, said there is now "a strong likelihood that they will be back at the negotiating table before too many IMF reviews have passed".

Ukraine debt crisis: could it be the next Greece?

11 August

Its economy has collapsed by a quarter, its debt burden is greater than its entire economic output and it is locked in a bitter dispute with a group of creditors as it seeks to secure a bailout from the International Monetary Fund.

This is not Greece, but Ukraine. While it fights a civil war in its eastern region against Russian-backed separatists, the country's beleaguered and cash-strapped government is seeking to negotiate its way out of a financial black hole that is coming to head as key repayments on its debt pile fall due.

Q&A: the Ukraine debt crisis

How big are Ukraine's debts?

As a percentage of its economic output, massive. The Financial Times says its debt pile is now equivalent to around 158 per cent of its economic output, which is less than, say, the 185 per cent debt-to-GDP ratio in Greece, but no less unsustainable.

It's worth noting, though, that the numbers are much smaller in absolute terms. While Greece has debts of around €320bn (£226bn), Ukraine came into its current crisis with much less external debt. The International Institute of Finance puts the country's total debts at $129bn (£83bn).

If its debts are much smaller, what is the problem?

Ukraine is in trouble because its economy has collapsed alarmingly, by around 23 per cent since 2012. That's in a similar order of magnitude to the decline experienced by Greece since the start of its financial crisis, but in about half the timeframe.

It was already experiencing problems before the protests that ousted former president Viktor Yanukovich, and the ongoing war in the east has only made matters worse. The FT reports that the IMF expects the economy to contract by a further nine per cent this year and the Government is running short of cash.

So it's looking for a bailout?

It has already secured one with the IMF worth around $40bn, as part of which the fund agreed earlier this year to provide a loan in instalments totalling $17.5bn. The rub was that it demanded the country reduce its external debt with creditors, by as much as 40 per cent. It wanted to see progress in this regard but despite talks with creditors still deadlocked, earlier this month the fund approved the next tranche of $1.7bn.

Is a 40 per cent cut feasible?

It's one hell of a haircut, which is why until now the group of four private sector creditors controlling around $9bn, led by fund manager Franklin Templeton, have refused. They say the government is not insolvent and debts are not unsustainable, and that the country merely needs time for the economy to recover. As such, they favour extending maturities rather than cutting the face value of the debt.

For its part the government had insisted the value of the debt must be reduced. The resulting stand-off saw it threaten to stop making repayments on outstanding debts, which would trigger a major default and even bigger losses.

How likely is a default?

It seemed considerably less likely after the country met a repayment of $120m payment on one tranche of its in full earlier this month, according to Bloomberg, which prompted a strong rally in Ukranian bonds. Investors took the repayment as a sign that talks with creditors are progressing well. Another $60m payment due later this month is also likely to be met.

Against that optimistic view, the Financial Times reports that ahead of the next round of talks in San Francisco on Wednesday, Ukraine's government has hinted it may put a moratorium on debt payments during September unless a deal is reached. This is effectively the threat of a deliberate default and prompted a sizable drop in the secondary value of the country's bonds as investors took flight.

How important is this meeting?

Very. A $500m repayment falls due on 23 September and provides a reasonably final deadline, while the IMF is undertaking a full review of the bailout plan earlier next month. The finance ministry has said in a written statement quoted by Bloomberg that this week's talks are the "final opportunity" to reach a deal in time to change terms on its big ticket debt.

Many continue to assert that a deal is likely, however. With creditors already having offered a modest concession on a cut in the face value of their debt in the order of five to ten per cent, the two sides "are not that far apart", Fyodor Bagnenko, a Kiev-based bond trader, told Bloomberg.