She’s a little busy with Greece at the moment. But just under two weeks after Christine Lagarde read the IMF equivalent of the riot act to Ukraine’s biggest bondholders over its debt restructuring…
They’ve responded. See below for the full open letter from Ukraine’s creditor committee on Wednesday:
The members of the Committee are writing this open letter in response to the statement from Ms. Christine Lagarde, the Managing Director of the International Monetary Fund (“IMF”),of June 12, 2015.All of the members of the Committee are long-term investors in Ukraine and fully appreciate the scale of the macro-economic and structural adjustment required by the country as a result of its current plight. Moreover, the members of the Committee and the broader private sector are very willing to offer assistance.The IMF Letter of Intent earlier this year outlined its requirements for a private sector debt solution. It listed three criteria under which success would be judged – a balance of payments criteria, requiring the private sector to generate $15.3 billion in financing during the restructuring program; a solvency criteria, obliging the government to achieve a public debt to GDP ratio of under 71% by 2020; and a financing objective, requiring the government to keep annual gross financing needs to an average of 10% of GDP annually between 2019 and 2025 and not to exceed 12% in any single year.While we disagree that the IMF’s three stated restructuring criteria provide the best framework to approach the current situation, noting that the massive deterioration in public debt ratios during the past 18 months has largely been driven by a dramatic devaluation of the exchange rate rather than excessive public spending, our committee recognizes the important role of the IMF in contributing to a collaborative solution. Similarly, the Committee supports the objective of maintaining a strong international reserves position and accepts that these would be higher absent repayments to foreign currency creditors, including the IMF. We have therefore constructed a proposal that meets all three of the IMF’s stated criteria and maintains an appropriate level of reserves.The IMF restructuring criteria have been interpreted by Ukraine as requirements for a principal haircut, a reduction in coupon payments and an extension of maturity dates. Such an approach would delay Ukraine’s eventual return to the global capital markets, raise the cost of capital markets funding if and when it does return, and increase the country’s medium-term dependence on official financing. In this context, a haircut would not deliver a stable platform for Ukraine’s economic stabilization or a return to growth.The IMF’s own assumptions point to continued market access, given it expects $7bn public market funding in 2017-2020. Imposition of a haircut, not to mention a debt default, would further reduce an already narrow universe of Ukrainian debt investors and make such financing impossible not only in 2017 but well beyond.It is in this context that we designed a proposal that delivers almost $16 billion of additional liquidity to the country – a significant share of the burden. The private creditors would not get any principal repayment before 2019, while the IMF is getting repaid $4.4bn between 2015 and 2018, and a total of $8.1bn by 2020.The Committee’s support for burden sharing does not extend to burden shifting and the unequal treatment of creditor classes. Ukraine’s repeated public insistence on a haircut targets specifically offshore holders of direct sovereign foreign currency obligations, leaving out all holders of quasi-sovereign and other forms of foreign currency sovereign indebtedness. Of the country’s $70 billion of public and publicly-guaranteed debt, only $19 billion has been identified for principal reduction.Arrangements have been made for a meeting next week between the Committee, Ukraine and the IMF in Washington. We view it as vital that all parties sit down and negotiate a fair deal for all creditors in good faith, without preconditions, as soon as possible.Mike ConeliusT Rowe Price
Penny FoleyTCW
Michael HasenstabFranklin Templeton
Igor HordiyevychBTG Pactual
It’s unusual for bondholders in any sovereign debt restructuring to start penning letters to the IMF, over the head of the government they’re talking (or in this casenot talking) to.
Then again, the IMF has already involved itself unusually heavily in the negotiations between private lenders and a government. Normally the fund makes its parameters for a sustainable country programme clear but leaves the details of exactly whose money is immolated for others to decide.
This time the fund has kept pointing to those three criteria mentioned in the letter and suggested that if there’s no deal respecting them, it’s not interested in giving Ukraine money only for private bondholders to take it out again.
It’s one way in which, even if Greece is still a mess, the IMF’s experience there is rewriting how other sovereign debt crises are resolved.
The bondholder letter’s requests meanwhile prefigure the ‘creditor engagement clauses’ and ‘information delivery requirements’ proposed recentlyin remodelled sovereign bond contract templates, designed to plug holes exposed by places like Greece and Argentina. That’s one model clause on the right.
As for the details of the Ukrainian debt negotiations…
Note how the bondholders’ letter basically concedes an unspoken ‘fourth’ criterion at this point — using Ukraine’s weakened FX reserves to pay bonds after restructuring. The IMF and Ukraine seem keen not to use reserves at all; the creditors talk about an “appropriate level”.
That isn’t going to go down well, and nor is the suggestion that the bondholders still think the IMF criterion for debt-to-GDP — 71 per cent by 2021 — is artificial.
Then there’s the reference to “unequal treatment of creditor classes”.
Which leads us to ask ahead of that Washington meeting next week: just how is the IMF treating that Russian bond now?
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