Though Jaresko has much more information in her possession on the potential IMF reaction to the debt operation's success, we did not find any evidence in the IMF memorandum or other statements of IMF officials that further cooperation with the Fund is conditional on the success of the debt restructuring that's currently being attempted.

ECONOMY NEWS

IMF cooperation might be conditional on debt operation, Jaresko says The IMF might decline to send Ukraine's second tranche (USD 5 bln expected in 2H15) if the government fails to restructure its debt with private creditors, Finance Minister Natalie Jaresko said in a March 23 interview with Bloomberg News. “If we aren’t able to come to an agreement by May/June, that jeopordises the IMF loan," Jaresko stated. “If we are out of the IMF program and we are not receiving official support from anyone, it is much worse for the creditors’ interests. I’m confident right now, given the conversations we’ve been having, that we will find a common understanding.” Jaresko is currently traveling throughout Europe to convince private creditors to restructure their debt with the Ukrainian government as part of a USD 15 bln debt operation. Alexander Paraschiy:  Though Jaresko has much more information in her possession on the potential IMF reaction to the debt operation's success, we did not find any evidence in the IMF memorandum or other statements of IMF officials that further cooperation with the Fund is conditional on the success of the debt restructuring that's currently being attempted.  What's more, in the transcript of a March 12 conference call on the extended fund facility arrangement with Ukraine, IMF European Department Deputy Director Thanos Arvanitis said that “for us, what is very important is that at the end of the debt operation, when it’s finalized, the debt is sustainable, public finances become stronger, and the economy can grow again. I think that this operation at this moment is in the best interest of not only Ukraine, but also its creditors, to make sure that the debt is sustainable and serviceable.”   To put it differently, the IMF position sounds more as if the USD 15 bln debt relief outlined in the memorandum is more a desired outcome rather than a conditionality for further cooperation with Ukraine. At the end of the day, the outcome isn't entirely dependent on Ukrainian authorities. On the other hand, it’s clear that Ukraine’s macro assumptions in the joint documents with the IMF should be revised in case the debt operation brings no success. In particular, Ukraine is planning to see end-2015 gross international reserves at the level of USD 18.3 bln (roughly 4.5 months of future imports), out of which USD 5.2 bln is planned as a gain from the debt operation. If this operation is not that successful, Ukraine and the IMF will either have to agree on smaller reserves (which would be slightly above three months of future imports – not that bad for such a distressed economy) or draw upon other sources of reserves.

Equities: Local equities added 0.3% on average yesterday, mainly thanks to the markup in UTLM (+9%), which offset declines in CEEN (-0.7%) and MSICH (-0.5%). In foreign markets, FXPO bounced by another 1.7%, MHP (-0.2%) held firmly above the $9 level, while continued profit-taking in KER (-5.7%, $2.4m) pushed the stock back to PLN 36. We may see some rebound in KER if last week’s buyer in the stock steps back in to protect his position. Locally, investors will remain focused on UNAF, following the resignation of Privat Group owner Kolomoysky as Dnipropetrovsk region governor. Finally, We do not expect the Moody's downgrade of Ukraine to have material impact on the market as the Eurobond restructuring exercise has been widely expected. Fixed income: The sovereign was heavy yesterday as Finance Minister Jaresko’s latest comments on restructuring were viewed as implying a serious push for a haircut, yet we still saw demand in Ukraine 17s and 23s. Quasi-sovereigns were quite active with two-way flows in OSCHAD and EXIMUK 18s. Corporates, particularly FXPOLN, mirrored this pattern. DTEK 15s were notably stronger, in a seemingly technical move following the issuer’s decent restructuring proposal. Finally DTEK 18s and METINV 18s saw better buyers.

Economy & Politics

Moody’s downgrades Ukraine to Ca, maintains negative outlook News: Moody’s downgraded its credit rating on Ukraine by one notch, to Ca from Caa3, maintaining a negative outlook on the rating. The agency said the likelihood of Ukraine’s external private creditors incurring “substantial losses” was the key reason for the downgrade. The agency expects Ukraine’s public and gross external debt to remain “very high” despite the upcoming debt restructuring and reform plans. It said it could upgrade the rating outlook in case of “sustained normalization of the geopolitical situation in eastern Ukraine” and improvement in the sovereign’s external liquidity position, while a rating upgrade would require more positive factors such as tangible progress on reforms, brighter growth prospects and better debt dynamics. (Moody’s) Dragon view: Ukraine’s new rating from Moody’s is on par with Fitch (CC, downgraded in mid-February) and a notch below S&P (CCC-, with a high probability of downgrade). Yesterday’s rating action echoed comments by Finance Minister Natalie Jaresko, who said that merely extending Eurobond maturities would not be sufficient to ease Ukraine’s debt burden and holdout investors were unlikely to benefit. Sovereign Eurobonds reacted negatively to Jaresko’s remarks, their current below-40 prices suggesting that a haircut is already priced in. One of the potential scenarios considered by the market envisages a restructuring into amortized bonds maturing in 2030, paying a 5.0% coupon capitalized over the next four years (vs. 7.1% on average now), and applying a nominal haircut of 20% (all assuming an exit yield of 13%). It remains to be seen what the Finance Ministry will offer to bondholders following consultations that have already lasted 10 days. However, as the prospective restructuring is shaping up to be coercive, rating agencies may further downgrade Ukraine’s rating to C or even Selective/Restricted Default in the coming months. The prospects for rating recovery will depend crucially on the economic situation, in our view, especially the public-debt-to-GDP ratio, which itself is a function of exchange rate dynamics and the speed of economic recovery. The current IMF program for Ukraine assumes the sovereign will be able to return to credit markets in 2H17, implying its ratings would need to recover to B by then.