KYIV – It’s been two weeks since the Ukrainian government confirmed that it succeeded in convincing private lenders to restructure $15 billion of debt owed them. As often is the case, the politicians resolved their immediate problems. Yet the debate continues on whether the deal benefits the Ukrainian economy in the long run.
The main success of the debt restructuring was that it postponed the first debt payments to 2019 from as early as this month, when $500 million was due to the private lenders, economists said. This enabled the government to avoid a possible default, as well as continue building its international reserves, which are critical for supporting the hryvnia, Ukraine’s currency.
“The International Monetary Fund (IMF) is elated with this agreement because it means its Ukraine program will be fully financed, while Ukraine is elated because it won’t have to pay anything for the next four years. By then, the Ukrainian economy will be in an entirely different condition, I hope,” said Dr. Anders Aslund, a resident senior fellow at the Atlantic Council in Washington.
The IMF has propped up the Ukrainian economy after the tumultuous events of 2014, including the launch of the Donbas war. Since then, it has sent $11.3 billion in loans to the government, the first payments of which are due to be repaid in September and December.
Financial observers and players were concerned that Ukraine wouldn’t be able to pay its IMF debt if the country was saddled with all its other debt burdens.
For that very reason, the IMF asked the Ukrainian government to pursue as large a “haircut” as possible, said Alexander Paraschiy, the head of research at the Concorde Capital investment company in Kyiv. It ended up being 20 percent of the debt, or about $3 billion. [“Haircut” is a financial term that refers to the amount of debt forgiven.]
The Ukrainian government got the haircut, more than what financial analysts had expected, as well as a postponed payment schedule (between 2019 and 2027 instead of between 2015 and 2023) in exchange for two conditions that favored the creditors, experts said.
The payment schedule was reduced to five years on average for the bonds (between 2019 and 2027), instead of seven years that had been expected by Concorde Capital. The creditors also gained an across-the-board interest rate of 7.75 percent on all the debt, compared to the weighted average of 7.22 percent for existing debt, as estimated by Concorde Capital.
Evidence of how the deal favored bondholders could be seen in the fact that Ukrainian bonds surged 22-24 percent in price on the day of the announcement, and about 28 percent since then.
Another advantage creditors gained was the inclusion of value-recovery instruments that take effect when Ukraine’s GDP starts improving. For example, the Ukrainian government would be required to award the lenders 15 percent of the dollar-denominated value of GDP growth in a particular year should that growth exceed 3 percent. That figure grows to 40 percent when GDP growth exceeds 4 percent.
Although Finance Minister Natalie Jaresko was lauded as having gained impressive results by publications such as The Wall Street Journal, such details of the deal – particularly the value-recovery instruments – didn’t impress financial observers such as Serhii Liamets, the chief editor of the Ekonomichna Pravda news site (epravda.com.ua).
“When taking into account interest payments, the value-recovery instruments can enable lenders to potentially return up to 90 percent of the restructured debt. So what restructuring can we be talking about?” he wrote on August 27, referring to the potential loss of the 20 percent haircut that could occur at Ukraine’s expense, resulting from the GDP-linked instruments.
Yet economists agreed that it would take rates of unprecedented economic growth for lenders to fully recover their haircut.
Other critics drew comparisons to Greece, which gained far more favorable conditions for restructuring its debt, 52 percent of which was forgiven (also with GDP-based recovery instruments). The interest rate for the Ukrainian debt slightly increased, while the interest on Greece’s debt dropped.
“The restructuring is arranged in such a way to give Ukraine a break for the next four years, which offers undeniable advantages,” said Oleksandr Zholud, an economist with the International Center for Prospective Research.
“At the same time, we certainly lost when comparing the conditions Ukraine received with those gained by the Greek government. Obviously, the agreement was a product of a complete lack of resistance from either side,” he noted.
Yet it’s unfair to compare Greece with Ukraine, said Dmytro Boyarchuk, the executive director of the CASE-Ukraine Center for Socio-Economic Research.
The very fate of the euro currency, and perhaps the European Union, hinged on Greece’s ability to survive its debt crisis, he said, which is why European leaders were willing to get directly involved in ensuring the Greeks far more favorable conditions.
Ms. Jaresko faced obstacles for nearly six months to achieve the deal. On numerous occasions, the members of the ad hoc creditors’ committee declined to speak with her directly. The committee consisted of five billion-dollar lenders, led by Franklin Templeton Investments of San Mateo, Calif.
The way Mr. Boyarchuk sees it, the talks dragging on so long worked to Ukraine’s favor, with the decision being made just as a global stock market selloff was occurring during the last week of August. “The lenders were afraid they weren’t going to get anything at that point,” he said. “There would have been no haircut if not for the market collapse.”
The restructuring deal doesn’t mean Ukraine’s debt headaches are over, economists said. The Verkhovna Rada still needs to approve the corresponding legislation, while the lenders will have to get their respective boards to approve the agreement.
The first hurdle emerged on September 8 when the holders of the shortest debt (due in September and October) issued a statement through their lawyers indicating that they’re dissatisfied with the terms of the deal and want to renegotiate.
Meanwhile, the Russian State Welfare Fund has a $3 billion debt that Ukraine must pay by the year end. Russian officials declined to participate in the talks and Finance Minster Anton Siluanov said on September 7 that Russia won’t engage in any future talks on the debt.
“We will turn to the appropriate judicial bodies,” he said. “Also, since we are an IMF participant, we will address the IMF’s program with Ukraine.”
The IMF is unlikely to support Russia’s position, said Mr. Paraschiy of Concorde Capital. Neither will Ukraine pay Russia, he said.
The loan was taken under the administration of President Viktor Yanukovych and is widely considered to have been President Putin’s bribe to keep Mr. Yanukovych from signing the Association Agreement with the European Union.
“In essence, the need to repay $3 billion will negate all the benefits of the approved debt restructuring for Ukraine,” he said. “We do not see enough reasons for the IMF to spoil Ukraine’s bailout efforts in one fell swoop. The sooner the IMF board decides on the status of the Russian debt, the smoother Ukraine’s debt operation will be completed.”
Editor’s note: Zenon Zawada serves as a political analyst for the Concorde Capital investment company based in Kyiv.