by Andrew Jay Rosenbaum
ANKARA
War-torn Ukraine is struggling with another, non-military crisis -- that of restructuring its debt.
The battle with the country's creditors – with claim and counter-claim emerging this week – is threatening to wreck a carefully crafted bailout plan constructed by the International Monetary Fund.
Among Ukraine's biggest creditors are five U.S. investment firms led by California-based Franklin Templeton, to whom about $23 billion is owed. These creditors risk a 'haircut' -- a potential reduction in the payback on their principal investment.
Then there is the debt to Russia, a $3 billion bond due for redemption in December this year.
Credit ratings agency Moody’s said earlier this year that such a haircut is almost inevitable:
“Although negotiations over the specific details of the restructuring are only now getting underway, Moody's believes that the likelihood of a distressed exchange, and hence a default on government debt taking place, is virtually 100 percent.
“The bonds' recovery value will be determined by the terms of the debt exchange and is currently being discussed with creditors.
“The terms could include a grace period on principal repayments during the term of the IMF program, a reduction in the existing bonds' current coupons, which now average 7.1%, and a haircut on the outstanding principal,” the agency said in March 24 statement.
Moody's downgraded the country’s credit to ‘Ca’ from ‘Caa3’ in March – the current rating is one that assumes a good chance of default. The outlook remains negative.
Ukraine's Finance Minister Natalie Jaresko is on the other side of the table. She is asking creditors to take a $15 billion haircut, so that the government may meet the requirements of the IMF bailout plan.
On April 27, the creditors agreed to a three-month respite for part of the debt, without which, Ukraine would have come close to default.
But there is still a wide gap between the two sides.
This week, creditors complained of lack of flexibility on the part of the Ukrainian finance ministry in a statement released on Tuesday.
Jaresko responded on Friday that “the finance ministry is concerned about the approach taken by the creditors’ committee representing the country’s external debt holders and their lack of willingness to engage in negotiations.”
But the ministry said that creditors have to agree on a sustainable debt level and debt service objectives which meet the targets of the IMF program.
“The ministry is committed to transparency, responsiveness and good faith negotiations and expects the creditors’ committee to do the same,” it said.
There is a deadline for these negotiations; the IMF will visit Kiev at the end of May to review conditions for the bailout plan. Deadlock on the debt could throw a monkey wrench into the entire bailout.
Then there is the separate issue of debt to Russia.
Moscow does not intend on participating in restructuring Ukraine's debt, Russian Deputy Finance Minister Sergei Storchak told reporters at a European Bank for Reconstruction and Development forum on Thursday.
Russian Finance Minister Anton Siluanov told Rossiya 1 television on Tuesday the country will seek arbitration if Ukraine does not repay the $3 billion of bonds it holds which will come due in December.
Russia bought $3 billion worth of Eurobonds from Ukraine in December 2013, with Kiev due to pay the debt off by December 2015.
More than 6,100 people have died in the conflict with pro-Russian separatist rebels in Ukraine, according to UN statistics. Fighting continues around the city of Mariupol, despite a ceasefire accord signed Feb. 12 by Russia, Ukraine, France and Germany.
“The conflict has ravaged the country’s economy,” Jaresko told the press on Friday.
“But the creditors do not seem to understand this.”
