Argentina Veteran Sees Ukraine Debt Risk as Deadline Looms
Ukraine and its main creditors can’t afford to allow the rift between them to widen if they want to keep a $23 billion restructuring on the rails, according to a veteran of Argentina’s Brady bond revamp in the 1990s.
The eastern European nation, which is relying on a $17.5 billion International Monetary Fund lifeline to keep its economy afloat, on Tuesday said bondholders led by Franklin Templeton were stalling negotiations, hours after creditors made a similar accusation. The nation’s bonds ended a four-day advance as the clash of opinions was seen to weigh on the chances for a deal before the end of an IMF review on June 15.
“If they don’t resolve this issue it could complicate a deal and postpone it,” said Daniel Marx, a former finance secretary who now runs Buenos Aires-based research company Quantum Finanzas. “It’s normal for there to be differences among the parties, but this issue has particular complexities, which is how the burden is being distributed.”
Almost half of Ukraine’s debt is held by just five creditors, the largest being Franklin Templeton, which the government yesterday indicated had turned down a request by Finance Minister Natalie Jaresko for a meeting last week. To complicate matters, Russia -- which annexed Crimea from Ukraine last year -- is the country’s other main creditor and has refused to come to the table to renegotiate a $3 billion Eurobond that’s maturing in December.
Few Alternatives
A key stumbling block in the restructuring is whether a reduction to the face value of the bonds is needed. While Jaresko insisted as recently as last week that a combination of cuts to the principal and coupons as well as a maturity extension was crucial to meeting IMF targets, creditors said Tuesday the terms can be met without forcing them to accept such losses.
The IMF objectives include a goal to save $15.3 billion over four years as well as lower debt-to-gross domestic product and budget financing needs. The nation also needs to restructure its national energy company and implement an anti-corruption program, among other measures.
It’s common in such conflicts for the country and the IMF to give importance to debt-sustainability exercises, and the creditors “not so much,” Quantum’s Marx said. “To continue forward the parties must understand there are not many other alternatives.”
‘Disappointing’ Progress
Ukraine’s $2.6 billion of bonds due in July 2017 fell for a second day on Wednesday, denting a rally that handed investors 11 percent returns in the past month, the most in a Bloomberg emerging-market bond portfolio after Venezuela. The debt fell 0.23 cent to 47.42 cents on the dollar by 2:47 p.m. in Kiev.
The creditor committee has shown a lack of transparency by declining to reveal its members, the government said in an e-mailed statement on Tuesday. That followed a statement from creditors that called the lack of progress “disappointing” and accused the government of failing to engage since the committee submitted an initial offer four weeks ago.
Templeton declined to comment on the Ukrainian government’s most recent statement, a spokesman said by e-mail on Tuesday.
IMF officials arrived in Kiev on Tuesday to start a review of progress on its targets with the Ukrainian economy predicted by analysts to shrink 5.7 percent this year after contracting 6.9 percent in 2014.
Playing ‘Hardball’
Before the country got its first $5 billion IMF loan injection in March, it had drained its foreign reserves by almost two-thirds in just 12 months defending its currency to as low as $5.6 billion. The hryvnia has since stabilized and reserves were at $9.6 billion at the end of April.
While the IMF has said it’s “vital” that a deal with creditors is completed by the end of its review in mid-June, it has stopped short of saying that Ukraine won’t get the next part of its loan if talks are still ongoing.
“Both parties want to play hardball,” Andreas Rein, a money manager who helps oversee $470 million in assets, including Ukraine Eurobonds, at Uniqa Capital Markets GmbH in Vienna, said yesterday by e-mail. “I don’t think the June deadline will hold.”
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