Daily Management Review

Ukraine in Severe Sovereign Debt Crisis-Would it Default Debt Servicing?


07/24/2015




Is Ukraine going the Greece way?

This is the question that is making the rounds in the economic circles of the globe. With a crucial meeting between the government and the ad hoc creditor committee slated for July 31 to finalize a sovereign debt restructuring agreement, economists await with baited breath in anticipation of a economical breakdown in Ukraine should the talks fail.

With a view to restructuring its sovereign debt, the Ukrainian government has been involved in intense negotiations with creditor representatives for the last few weeks.

With a continued civil war in the east of the country and a standoff with Russia over gas supplies, Ukraine’s economy is in desperate trouble. In a collapse that is similar to what happened in Greece but much faster, the Ukraine GDP has fallen by 23% in the last two years. This has resulted in the debt to GDP ratio of Ukraine to touch a staggering 158% of the GDP and many believe that it is just a matter of time that the country fails on its commitments to repay debts unless the creditors agree to a debt restructuring.

To address the problems of the drastic reduction in national income and consequently reduction in the government coffers, the Ukrainian government is pushing for a reduction of 40% on the face value of all debts. The claim of the government is that the economical problem for Ukraine is that of solvency and not a shortage of liquidity. Reduction in Solvency means that governments would not be able to pay the debt or part of the debt at all.
 
The creditors on the other hand are of the view that the present problem for the country is only temporary where there is a liquidity problem with less cash in hand. Once the problems with Russia are sorted out and the civil war ends, the country would get back to its course of economic development and liquidity would increase. At that point the Ukrainian government would be able to repay all of the debt.
 
The government has already rejected the creditor’s proposal of utilizing $8 billion from the Ukraine’s central bank reserves to repay 40% of the debts. The rest of the debts were proposed to be restructured with extension of maturity period of up to 10 years and reduction of interest. The government says that repaying with the central bank reserves would further escalate the economical problem for the country. It would also further increase the inflation that is at 46% at present.

The government claimed that the step would get Ukraine’s gross reserves of about $9.6bn critically low and create a Greece like situation where central reserves were used to service external debts.
 
On the other hand the creditors are not willing to write off any loans at present.
 
The IMF has predicted that in 2015, the Ukrainian economy would reduce by 9%and expected inflation was put at 46%. By the end of 2015, the cumulative economic contraction is forecasted to be at 32%.

The IMF also noted that unless hostilities, that does not seem to come to an end in the near future, is stopped, the return to growth for Ukraine would not be possible.

The IMF, while willing to bail out Ukraine of the crisis, wants all the debt be restructured. Echoing what the IMF had said during the Greece crisis, it said: “creditors have to take a haircut or we won’t lend any more”. This means that Ukraine would have to convince the creditors to restructure the debt to get any help from the IMF.

Ukrainian government is talking about a debt moratorium. But Russia, one of the major lenders to Ukraine, would react strongly against any debt moratorium. Any preferential treatment to Russia on the other hand would not be accepted by the other creditors.

But if it can’t get creditors to agree to a sensible restructuring of its debt, the IMF will suspend further funding, making default and a disastrous economic collapse inevitable.
 
A debt moratorium in September appears almost certain if no restructuring can be negotiated. Ukraine has to make a payment of $500 million in September which it has already said it would not be able to pay.
 
In case of debt moratorium, the bond prices would be reduced and delay Ukraine’s return to markets.

Experts say that at this moment the only way open to Ukrain si to delay the debt moratorium till the time the IMF funding is secured that can help the country buy the gas reserves bypassing Russia to tide through the harsh winter.
 
(Source: www.forbes.com)







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