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Ukraine has asked its creditors to freeze payments on international bonds for two years in an effort to focus its financial resources on pushing back against Russia.
Creditors have until August 9 to vote on this proposal. Ukraine said that its plan is an exercise in debt management, implying that Kiev’s efforts are for investors to devalue them.
Russian invasion of Ukraine
Creditors have already said they will suspend payments they owe and have called on bondholders to accept Ukraine’s request for a freeze.
The group, including Canada, France, Germany, Japan, the United Kingdom and the United States, said they would offer a coordinated debt moratorium from Aug. 1 until the end of 2023, with the possibility that this period could be extended for another additional year.
How much debt does Ukraine have?
At the end of 2020, according to World Bank data, Ukraine had $130 billion in external debt.
Ukraine has decided that almost $20 billion of international bonds will be subject to a freeze – 11 dollar-denominated and two euro-denominated securities – maturing from 2022 to 2030. Ukraine also has a guarantee linked to the growth of Gross Domestic Product . This was created during the 2015 debt restructuring as a sweetener for creditors.
Who are the bond creditors?
Ukrainian sovereign bonds are held by large fund managers.
EMAXX data shows that the world’s largest asset manager, BlackRock, holds $1.2 billion in various funds in the United States and the United Kingdom, Alliance Bernstein has $580 million, while Eaton Vance and PIMCO both have 300 million dollars of bonds.
BlackRock declined to comment on the matter, while Eaton Vance and Alliance Bernstein did not respond to questions sent by Reuters.
What is the state of Ukraine’s public finances?
Ukraine’s economy has taken a major hit from the invasion that Russia launched on February 24, and forecasts are that the economy will shrink by 35 to 45 percent during 2022.
Ukraine has estimated a fiscal deficit of $5 billion – or 2.5 percent of its pre-war GDP – per month, which economists estimate will push the fiscal deficit to 25 percent of GDP. , compared to only 3.5 percent before the conflict.
Since the beginning of the war until July 12, Ukraine has received 12.7 billion dollars in external funds from international financial institutions, but also from other governments, the Ministry of Finance announced. Kiev has also secured the same amount through financing from securing donations from the central bank and local government, mainly through the sale of so-called “war bonds”.
Moody’s rating agency, in the latest calculations, said that tax revenues have decreased by over a third since the beginning of the occupation, while in the same period the Government’s expenses have increased by about 36 percent, mainly due to an increase of 319 percent of defense spending.
The recent opening of an account at the International Monetary Fund to channel donor resources for balancing payments and budget needs, but also SDR donations (international reserve assets created by the IMF to meet the needs of member states) for Ukraine, have help to ease the economic situation.
What are the consequences of the debt freeze?
A moratorium would allow funds to be immediately freed up to be used for war spending. The Finance Ministry said this would help “alleviate the $5 billion monthly fiscal gap” as the country would not have to use its international reserves to pay maturing bonds in a dire financial situation.
“Most people have been expecting Ukraine to go bankrupt since the invasion started, so the debt freeze makes sense in that regard,” said Stuart Culverhouse, chief economist at London-based data firm Tellimer.
Ukraine’s proposal is a suspension of debt service, but the question remains how Kiev will return these securities in the future. A debt restructuring may be the next move.
The government and creditors will negotiate and then are expected to agree on new terms for the bonds, which could include maturity extensions, cuts or a combination of the two.
“This will not be a permanent scar for Ukraine in order to regain market access,” Culverhouse said. “Everyone can accept that this is a consequence of Russia’s aggression, and creditors will be prepared to look at Ukraine in a more favorable way.”
The last time Ukraine restructured sovereign bonds was in 2015.
What will happen next?
Investors have received a formal consent request – an offer by the issuer to change some of the terms of the bond’s indentures.
The Ukrainian Ministry of Finance on Wednesday held a meeting with creditors to explain the details of the proposal and other points.
Creditors have until August 9 to vote on the proposal and the result of the vote will be published the day after.
There are some advantages to what is happening on the sovereign side. Last week, Ukrainian state energy company Naftogaz asked creditors for a two-year debt payment freeze.
This proposal raised concerns and some creditors said that the period required to raise debt payments is too long.
“Why two years? It’s not clear, but it doesn’t look like the war will end soon, and it’s very difficult to make a debt sustainability analysis in this situation,” said one creditor, who asked not to be identified.
“It is not clear whether this proposal will be widely accepted by creditors. There may be some opposition from creditors who may request that the payment freeze period be reduced.”
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