2024-07-23 13:21:05
Ukraine faces not only defeat in the war against Russia, but also a significant financial challenge from Western creditors: The two-year moratorium on $20 billion in government bonds expires on August 1.
Lenders had frozen repayment of Kiev’s debts in the months following Russia’s February 2022 invasion.
And Ukraine could default in August if it doesn’t pay within a 10-day grace period.
Ukrainian Finance Minister Serhii Marchenko expressed confidence that an agreement would be reached before the deadline.
Ukraine wants to maintain good relations with private investors and is therefore faced with the following options: either renegotiate the debt structure or extend the moratorium to avoid national default. Analysts at JPMorgan Chase & Co. they believe it is possible to extend the moratorium for a few months, but not for another two years.
Negotiations with private lenders to restructure the debt ended without an agreement on June 14, with bondholders rejecting Kiev’s proposed level of repayment.
Ukraine asked for a haircut of up to 60 cents on the dollar, while bondholders were only prepared to absorb losses of 22.5%.
Creditors of Ukraine
The window for restructuring Ukraine’s debt has become increasingly tight, as the country needs it to continue receiving funds from the IMF bailout program and to restore private financing flows for reconstruction.
Ukraine also proposed delaying payment obligations and offered to swap outstanding bonds for new debt maturing in 2040.
Ukraine’s creditor base is fragmented, with a negotiating committee representing only about 20% of outstanding debt. This group includes Amundi SA, BlackRock Inc., Pimco and Amia Capital LLP.
Ukraine says it is also working with creditors outside the committee.
Consent is critical because holders of at least two-thirds of the outstanding debt must reach an agreement to be binding on all creditors, with a minimum 50% stake required for each bond.
The committee of investors representing about 20% of the bonds suggested the haircut be just above 22%.
However, the IMF estimates that it is far from the main targets for the amount of public debt. “Strong armies must be supported by strong economies to win wars,” says Ukraine’s finance minister, admitting that the war with Russia could be lost not only because of a lack of ammunition but also because of economic bankruptcy. “As we approach the August 1st deadline, we must urge our bondholders to continue productive and good-faith negotiations, with more substantial debt relief that can meet the IMF’s goals,” Marchenko added.
Debt restructuring talks also reflect investors’ deep uncertainty about the course of the war and how much debt Ukraine’s economy will be able to shoulder.
All about the war
After all, the economic situation of Ukraine is miserable.
Almost all of its domestic revenue goes to war finance.
Financial support for social services comes from the European Union, the United States and the International Monetary Fund.
The IMF plays a critical role as the $15.6 billion loan granted to the country in March 2023 – the first for a nation at war – sets the standard for sustainable debt repayment.
The $61 billion US aid package approved in April includes $7.8 billion for the federal budget.
The finance minister says this aid will cover this year’s budget, but warns of a potential “additional” shortfall of up to $12 billion in 2025 if the war continues.
However, the forecast of Ukraine’s economic capacity remains uncertain and depends on the escalation of the war. GDP is still down 25% from the level before the Russian invasion.
Russian attacks on critical infrastructure have increased, while the government cut its growth forecast for this year to 3.5% from 4.6% previously.
International support uncertain
Defense spending originally planned for 2024 was €42.2 billion.
They are now expected to increase by almost 30%.
The finance ministry justifies the planned additional spending with growing security and defense needs and emphasizes the need for Kiev to rely on its own resources.
The German federal government plans to cut aid to Ukraine from €7.48bn to €4bn in 2025. Republican US presidential front-runner Donald Trump has also spoken out against continuing to contribute significantly to the cost of war.