August 27, 2015 – The Ukraine said today it had reached a crucial debt restructuring deal that will see lenders accept a 20-per cent write-down and keep global markets open to the cash-strapped ex-Soviet state.
The announcement marks a monumental victory for Finance Minister Natalie Jaresko, a US-born financial expert whom President Petro Poroshenko plucked from a Kiev investment firm in December and tasked with saving the war-torn country from hurtling into default.
Prime Minister Arseniy Yatsenyuk described the agreement as a blow to “enemy” Russia.
Franklin Templeton and three other financial titans that own nearly half of the US$19 billion (€16.8 billion) in commercial debt under discussion had argued that the east European nation was in strong enough shape to repay what it owed in full.
“I think it’s a historic success for Ukraine, I think for emerging markets generally,” Jaresko said in an interview shortly before Yatsenyuk made the formal announcement at a televised government meeting.
The painful talks lasted for five months and saw the International Monetary Fund and the United Sates put immense pressure on the bondholders to accept short-term losses in return for preserving Ukraine’s pro-Western leaders from being forced into resuming their reliance on Russia.
Ukraine’s growth is expected shrink by nearly 10 per cent due in part to the loss of key coal and steel mining factories in the pro-Russian separatist east that saw industrial production plummet by about a fifth over the first six months of the year.
“Why is (the deal) important? Ukraine like any family can only borrow so much. And then at some point those people, organisations that lend you money, don’t want to lend anymore, because you are not creditworthy,” Jaresko said in the English-language interview.
“We were already at the point as a country where the commercial creditors said: ‘Too risky.’ Now the official creditors said: ‘Within limits, we will support you.'”
The possibility of Ukraine either outright defaulting on its obligations or imposing a payment freeze could have shut Kiev out of global borrowing markets and severely hampered its IMF-led austerity and economic restructuring drive.
The IMF had patched together a US$40 billion (€35.5 billion) rescue package aimed at a stabilising the country’s financial footing after more two decades of corruption saw its economy shrink from levels seen in Soviet times.
But that deal required a compromise with bondholders that could save the nation of about 40 million people US$15.3 billion over the next four years.
The terms announced by Kiev will see the lender take a 20-per cent cut to the face value of their bonds but see slightly higher interest payments in return.
“The deal agrees a 20-per cent haircut on Ukraine’s stock of sovereign and sovereign guaranteed debt, having immediate debt relief totalling approximately US$3.6 billion,” the Ukrainian finance ministry said in a statement.
“This takes Ukraine’s privately held sovereign, sovereign-guaranteed and quasi-sovereign debt from US$19.3 billion US$15.5 billion.”
Ukraine also agreed to raise its coupon rates to 7.75 from 7.2 per cent while the lenders accepted slightly longer repayment terms.
“Maturities have been extended to the period of 2019-2027, compared with 2015-2023. It means that no sovereign debt will be amortised during the current IMF Extended Fund Facility programme (of) 2015-2018.”
The compromise also keeps Ukraine from being forced into making any principal payments should its real annual growth rate stays below three per cent. “Total payments (will be) capped at 1.0 per cent of GDP from 2021 until 2025,” the Ukrainian statement said.
Kiev had threatened to impose a debt repayment freeze within a matter of days had no deal been reached. “The deal avoids default (and the use of a moratorium) on debt payments,” said the statement.
“Ukraine will continue servicing its debt obligations in accordance with their terms, with the exception of a temporary technical suspension of payments of the Eurobonds maturing in September and October in order to allow the completion of the debt restructuring.”