It’s jargon-tastic and it’s come out of Washington DC late on a Friday, but do read this IMF statement on Ukraine’s debt restructuring. It’s financial history in the making…
For completion of the first program review, and in general for the program to go forward, IMF policies require, among other things, an assessment that the program is fully financed and public debt is sustainable with high probability. Achieving this depends critically on financial support from Ukraine’s private creditors, in addition to the significant assistance already committed from official partners. In this context, the IMF attaches great importance to reaching the three objectives under the debt operation announced by the authorities, namely (i) generating $15.3 billion in public sector financing during the program period; (ii) bringing the public and publicly guaranteed debt/GDP ratio to under 71 percent of GDP by 2020; and (iii) keeping the budget’s gross financing needs at an average of 10 percent of GDP (maximum of 12 percent of GDP annually) in 2019–25.To ensure economic and financial stability, these objectives need to be achieved in a manner consistent with maintaining a strong international reserves position over the medium term, in line with projections under the program. In this regard, the NBU’s international reserves cannot be used for sovereign debt service without the government incurring new debt, which would be inconsistent with the objectives of the debt operation. Ultimately, Ukraine’s debt repayment capacity is limited by its fiscal capacity.Rapid completion of the debt operation with high participation is vital for the success of the program, since Ukraine lacks the resources under the program to fully service its debts on the original terms. The IMF, in general, encourages voluntary pre-emptive agreements in debt restructurings, but in the event that a negotiated settlement with private creditors is not reached and the country determines that it cannot service its debt, the Fund can lend to Ukraine consistent with its Lending-into-Arrears Policy.
Translation: Dear Ukraine, if you can’t get an agreement with your bondholders, stop paying them if you need to. We’ll lend you the money to tide you over. We don’t want to lend you money just to let them get paid on our dime. We suggest bondholders read the manual.
Note the timing of this statement:
a) It comes before a week in which Ukraine is scheduled pay two coupons on its debt, one a $78m payment due the 17th on a bond issue maturing 2016, the other $75m onthat Russian-held bond. (What Ukraine does or doesn’t do with this bond — given its questionable status — will be worth watching.)
b) It also, not incidentally, comes almost exactly five years after the IMF committed bailout loans to Greece without first requiring private bondholders to lose money, something it has internally regretted ever since.
While the IMF was quite accurately worried about systemic risks of a default at the time, continuing to let private creditors cash out until March 2012 did not help fix Greece’s unsustainable debt in the end, and a member of one of the world’s richest currency unions is now a serious financial risk to the Fund’s 187 other members.
This early procrastination regarding private bondholders is, ultimately, why it remains touch and go whether Athens will pay the IMF back at the end of this month and why relations with all its official creditors are so toxic today: they were the ones left holding the bag.
Ukraine’s bondholders have probably miscalculated how determined the IMF is to avoid repeating another Greece.
Until this week, Ukrainian bond prices had actually rallied to the point of implying little to no haircut, shrugging off the reawakening war in eastern Ukraine. Themoratorium which Ukraine is now legally authorised to impose on their claims was treated as a minor inconvenience, even though negotiations for a debt restructuring have gone slowly and not promisingly.
Despite this, the main bondholders committee was confident enough to speak “in the interests of Ukraine” as recently as Thursday:
[Finance] Minister Jaresko has been in possession of a detailed IMF-compliant solution from the Bond Committee for over a month. We are deeply concerned about the stance the Minister is taking, which is not in the interests of Ukraine. We are ready and willing to start talks at any time.
Again, the Fund’s latest view may shake this.
Last week the government threw out that 10-year extension proposed by the creditor committee that includes Franklin Templeton — and interestingly, the IMF quite directly refers to the reason why in the above statement.
The plan would among other things move the bonds onto an amortising payment schedule. It foresaw $8bn being paid out between 2019 and 2020, which the government blew up over because of the implied pressure on the central bank’s reserves, used for repayment.
One of the issues here is that 2020 isn’t an accidental date: the plan is trying to bring Ukraine’s debt to under 71 per cent of GDP by then, to comply with the third criterion mentioned.
Not surprisingly, some observers have grumbled that a debt to GDP ratio is artificial for determining Ukraine’s actual ability to pay creditors, versus measures of cash flow.
On the other hand, those observers may also be underestimating IMF executive board members’ tolerance for indulging large European bailouts after Greece.
Financial history is, at the very least, being rewritten.
The bondholders are now likely to warn that any abrupt halt to payments by Ukraine next week, or in the coming weeks — much larger payments loom in July and September — will unleash holdouts on the debt, making agreement even harder. Notable, Russia has the means (and the tanks) to be a particularly nasty holdout.
More on how Ukraine could counteract that, in a future post…
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