Ukraine has one month to avoid default – The Economist

Ukraine has a month to reach an agreement with creditors on debt restructuring and avoid default.

Source: The Economist

Details: Ukraine's creditors had agreed to suspend debt repayments for two years. However, the moratorium on payments to private foreign bondholders will end on 1 August.

If Ukraine defaults, it may undermine investor confidence in the West’s obligations and would be catastrophic for Ukraine's post-war recovery. This could potentially complicate Ukraine's future access to financial markets.

Ukraine has proposed an arrangement with its creditors which would reduce its debt by 60% of its current value, while creditors say 22% is more reasonable. The IMF wants to reach an agreement with Ukraine on debt relief, but a deal within the available timeframe appears unlikely.

Ukraine is in urgent need of financial support. Although the allies donate impressive sums, these take the form of weapons and targeted funding rather than cash. The EU has pledged slightly more, but this is still only US$38 billion over three years.

According to the IMF, Ukraine would just about make ends meet if it implemented the radical restructuring that bondholders have rejected. But bondholders are asking how the IMF can be so certain, especially given that its analysis is months old.

If no restructuring agreement is reached, Ukraine will have two options: arrange an extension of the debt payment moratorium, or default.

The reluctance of private investors is indicative of more than just Ukraine's financial prospects. During a regular restructuring, creditors speculate on the country's economic prospects. Lending to a borrower that is at war involves a second gamble: that it will win.

A great deal is riding on the level of Western assistance. Taxpayers may grow tired of giving away billions. The Economist says Donald Trump, who has been sceptical of the amounts assigned, looks increasingly likely to return to the White House in November.

Bondholders are likewise dubious about Ukraine's long-term rebuilding plans, assuming it wins. While Ukraine’s allies and the IMF claim that restructuring now will enable Ukraine to reenter the financial markets as soon as the war is over and the allies waive debts, investors are sceptical that such a day will ever come. They fear the restructuring will be the first of many attempts by Ukraine's supporters to transfer the financial burden of the conflict and reconstruction costs from the government to the private sector.

Background: 

• Ukraine needs an extra US$9.5 billion this year to fund key recovery efforts in defence, energy, rebuilding housing, agriculture, natural resources, digital technologies, and information technology.
• The Ukrainian Ministry of Finance is continuing negotiations with Eurobond holders on restructuring, specifically partial debt cancellation; in the near future, these discussions will be made public.
• A consortium of foreign bondholders, including BlackRock BLK and Pimco, intends to urge Ukraine to resume interest payments on its debt next year.

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