Why Ukraine Will Get Its Debt Restructured

Why Ukraine Will Get Its Debt Restructured

Push is quickly coming to shove over Ukraine’s $35 billion in government debt, $23 billion of which must be either paid or restructured in June. This is a must-watch for its wider implications. The question is stark: Who is going to do the shoving and who gets pushed? 

On one side stand private-sector bondholders, who have been talking a very tough game. No, they won’t take the kind of haircut—a write-down of principal and interest—that they accepted in the Greek case three years ago. In the trade this is called “Greek fatigue,” as in enough’s enough.   

Related: Ukraine Creditor Group Repeats Objection To 'Haircut' 

On the other side stand the Kiev government and its international backers. Among these the International Monetary Fund is paramount, but the U.S. Treasury and the European Union are also on the scene. 

Natalie Jaresko, the Ukrainian finance minister, makes the argument plainly and often. “I don’t see a meltdown per se,” she said at a gathering in Kiev earlier this month, “but the question is whether we can continue to service our debt.” As if in response, the parliament in Kiev voted last week to give Jaresko the power to suspend debt payments to “unscrupulous” international lenders. 

I don’t know the difference between a meltdown and a meltdown per se, but Jaresko’s “per se” seems in danger of disappearing. Near term, a meltdown would mean a moratorium on debt payments, which is what we say in polite company when we want to avoid the term “default.” 

I’d say this game’s just about over. It’s the bottom of the ninth and Kiev is at bat. It either scores a deal with its creditors or the home team turns in a losing season. 

Related: Summers Says Ukraine Shouldn’t Pay 'Selfish' Bondholders 

My call: Jaresko will get enough of what she wants to keep Ukraine staggering along. Two reasons. 

One, reports last week indicate a thaw in her contacts with investors, who recently formed groups to advance their positions, which vary. Two, the geopolitics animating the Ukraine case are simply too powerful: Propping up Kiev involves way more than a bunch of bank transfers that bring smiles to bondholders’ faces.    

It’s hard to distinguish the black hats from the white in all this for the simple reason nobody wears either this time. Settling Ukraine’s debt is a sordid contest of wills, and whichever side wins doesn’t deserve to, for my money.

That zinger requires explanation, so here goes: 

International bondholders make the same argument advanced in the Greek case: We extended credit, the terms are agreed, and we expect them to be observed. Not only do we want our money back; there’s also the question of maintaining order in international lending markets. 

Creditors nurse another gripe, and it’s not to be missed. 

Related: Russia Says Ukraine Debt Repayment Law Amounts to Default 

Until the global financial and economic crises of the past seven years, the I.M.F. did things pretty simply. It extended a bailout with severe conditions attached and the banks got paid. As a European friend put it not long ago, it was too embarrassing for the fund to write checks directly to lenders, so it wrote them to the debtor nation, which then wrote the checks to creditors. 

But amid multiple crises the fund has taken to requiring lenders to take at least modest hits themselves. These are the frequently cited bail-ins, or haircuts. “We’ll come in on this,” the I.M.F. effectively tells the banks, “but for less than net present value. You suck up the rest.” 

This is new and not popular, to put the point mildly. Lenders took a 50 percent-plus haircut in Greece’s 2012 restructuring, but the Greeks—as is now evident—may’ve won the battle and lost the war. 

In April creditors accepted a three-month moratorium on a debt payment due from a state-owned Ukrainian bank. But that, they have since stressed, involved no adjustment in terms. 

A final point to be noted: In a television interview Friday, Russian Prime Minister Dmitry Medvedev indicated that Moscow saw no reason to alter any of the terms on the Ukrainian debt it holds. It’s a hard line, but I’m not sure anyone could expect otherwise in the context.   

Related: Sanctions-Hit Russian Economy Shrinks In First Quarter 

Ukraine argues that it has instituted one of the most extensive reform programs in the I.M.F.’s annals. It is cutting wastage, bureaucratic red tape, impediments to foreign investment, corruption, labor protections, and subsidies. 

Kiev insists it can meet the I.M.F.’s core condition—$15.3 billion in savings—to shake loose further tranches of the $40 billion bailout the fund supports and partly finances. “The case for debt reduction is as strong as any that I have encountered over the past quarter century,” Lawrence Summers wrote in a much-noted Financial Times comment earlier this month. 

That’s the explicit argument. The implicit argument is that the geopolitics surrounding Ukraine’s future can’t be ignored. Summers, indeed, brought this point to the surface in his FT item. 

Last Friday Jaresko signaled that direct talks in London with lender groups, which have so far looked pointless, will soon begin in earnest. “There is noticeable progress,” she said in a telephone exchange with Reuters. “Advisers are in contact every day. We expect that the next step will be a meeting with the creditors.”

A few creditor groups have already signaled that they’ll accept marginal write-downs, opening the door to protracted horse-trading. My call: At bottom this is a political crisis, and in the end the politics will rule in Kiev’s favor.

It’ll be no cause for hallelujahs either way.

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Creditors look selfish and spoiled. They lent the money -- every profligate borrower requires a profligate lender. The word missing from their vocabulary is “risk.” Equally, the I.M.F. doesn’t—or shouldn’t—operate as a bank-rescue mechanism. It is supposed to rescue nations.

As to Kiev, a good deal of its argument is simply false. The Poroshenko government is proving at least as corrupt as the regime it replaced; Prime Minister Arsenyi Yatsenyuk is now under investigation on suspicion of misappropriating $325 million in public funds. 

There are serious political liabilities, too. Yatsenyuk’s reform package is ambitious, yes, but it has rendered him deeply unpopular, if not despised, my sources in Kiev report; political instability in the capital is already evident.   

Finally, Kiev has been very uncooperative in advancing the terms of the settlement agreement known as Mink II. Europeans now view it as the main impediment to a negotiated solution, my sources tell me. 

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