Ukraine has secured a 20% writedown on $18bn (£11.6bn) of its foreign debts in a deal its finance minister described as win-win for the war-torn country. Kiev’s agreement with its largest creditors is an attempt to stabilise government finances after more than a year of fighting on its eastern border that has brought the country to the edge of bankruptcy.
The hedge funds holding Ukrainian debt will write off around $4bn in return for securities that will pay holders a percentage of Ukraine’s economic growth from 2021. But in a move that is likely to dismay many MPs in the Kiev parliament, the government conceded that it must pay a higher interest rate on the remaining debts.
The deal, which still needs to be approved by creditors outside the group, includes a four-year extension on repayments to give Ukraine breathing space. But the interest rate on the bonds will rise 0.5 percentage points to 7.75%. It ended months of tense negotiations aimed at helping to keep the country on track with its International Monetary Fund-led bailout programme, plugging a funding gap and preventing a unilateral debt default.
Ukraine’s finance minister, Natalia Yaresko, who had sought a 40% debt haircut, said the deal meets all targets set by the IMF bailout programme and would allow the country to move ahead. “Everyone’s done well out of this deal. That’s why it’s collaborative. It’s not one side winning, it’s a win-win situation. We’re all now moving forward without putting the value of the bonds at any further risk,” she said.
Ukraine’s sovereign dollar bond prices surged after the news, indicating that traders viewed the remaining debt to be on a more secure footing. Its 2017 issue rose 8.7 cents to trade at 64.5 cents in the dollar, according to Tradeweb data, while the 2022 bond rose 10 cents.
In Moscow, the Russian finance minister, Anton Siluanov, said Russia would not participate in the agreement. Ukraine owes Russia a $3bn eurobond due for full repayment in December. The need to repay Russia represents a dilemma for the IMF as it considers whether to pump further funds into Ukraine, possibly in conjunction with Brussels. It is not officially allowed to continue lending to a country that is in default to another sovereign.
The debt deal should help keep Ukraine’s national currency, the hryvnia, stable and allow increased spending on defence in the east, where, as well as the rebellion by pro-Russia separatists, Ukraine must also provide greater financial support for the poor.
President Poroshenko told Ukrainians this week that the threat of full-scale invasion remained, asserting that some 50,000 Russian troops were massed on Ukraine’s eastern borders, with a further 9,000 inside the self-declared rebel republics.
The Washington-based lender of last resort has already come up against criticism for its lending policy, which critics believe forces the government to pursue draconian austerity measures that will depress growth and increase its debts. Exotix credit strategist Jokob Christensen said the bondholders were the clear winners. “I have a hard time seeing how this deal will help reduce [Ukraine’s] debt to 71% of GDP in 2020, which is one of the crucial targets in the operation,” he said.
Gabriel Sterne, head of global macro at Oxford Economics, also cast doubt on whether the deal would make Ukraine’s debt levels sustainable and added: “There is a strong likelihood that they will be back at the negotiating table before too many IMF reviews have passed.”
Talks had been held up over a disagreement with creditors on whether to provide Kiev with a writedown on the face value of the bonds. Kiev had initially sought a 40% cut. “We started in different places, because the creditor committee didn’t believe we had a solvency problem … but my goal was not a particular number, it was meeting those IMF targets,” Yaresko said. She added that she hoped it was highly unlikely that remaining creditors would reject the agreement and forecast that the process would be wrapped up by the end of October.
