Looming debt default threat alarms Ukraine’s creditors


Ukraine’s biggest private creditors Thursday expressed alarm at the creeping pace of their negotiations with cash-strapped Kiev and its escalating threat of a partial debt default.

The war-torn and economically ravaged former Soviet country is trying to reach an agreement with some of the world’s biggest investors that could save it $15.3 billion (€13.6 billion) over four years.

But a deal has proven elusive. Kiev is up against seasoned financial world heavyweights such as Franklin Templeton and other titans who believe that Ukraine has the funds stashed away in its central bank to repay in full.

Ukrainian Finance Minister Natalie Jaresko has issued at least two public warnings in the past week about Kiev’s inability to make upcoming coupon payments due to growing budget constraints and dwindling tax revenues.

The Western-backed government must also make a $75 million (€67 million) interest payment to Russia on June 20. Moscow has warned that Kiev’s failure to do so would prompt it to ask the International Court of Justice in The Hague to declare Ukraine in default.

Ukraine’s four biggest private lenders argue that Jaresko could dip into the central bank’s reserves and avoid a debt writedown for anyone—- something the U.S.-born career economic analyst and investor has refused to do.

The commercial creditors’ committee said on Thursday that it was growingly increasingly anxious about the pace of negotiations.

“Minister Jaresko has been in possession of a detailed IMF-compliant solution from the Bond Committee for over a month,” it said in a statement released to AFP.

“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.”

Jaresko and Ukrainian Prime Minister Arseniy Yatsenyuk are currently meeting with officials at the International Monetary Fund in Washington in order to secure the release of a $1.7 billion loan payment in July.

The Fund had initially warned that Kiev’s failure to strike a debt restructuring agreement by the time its board meets before the end of the month may jeapordize the fate of its entire $17.5 billion Ukrainian rescue package.

But the IMF’s second in command signaled on Tuesday that Kiev could still get the money without a debt deal.

“We have a policy of lending into arrears which allows us to continue lending to a member state when it has arrears with private creditors,” First Deputy Managing Director David Lipton said in Washington.

Analysts said Ukraine clearly had the cash to cover its immediate debts in full.

Its central bank reserves stood at $9.9 billion at the start of the month, while each of the upcoming coupon payments is measured in the tens of millions of dollars.

But Jaresko has resolutely refused to touch the central bank’s money and is now bargaining for various delays and interest rate reductions that some reports said will see investors suffer losses of up to 40 percent.

Analysts believe that Ukrainians’ daily hardships will make it especially tough for Kiev to justify payments on a $3 billion loan that Russia gave former President Viktor Yanukovych before he fled the country under the pressure of public protests.

“The main question facing the Ukrainian leadership is whether it would be (politically) correct to make payments to lenders now — especially the ones dealing with the Russian loan,” said Oleksandr Zholud of the International Center for Policy Studies.

“One cannot exclude the possibility of these payments being frozen,” he said in a telephone interview.

Others predicted a positive debt restructuring outcome with the private lenders that would leave Russia as the main — and possibly only — proponent of seeing Ukraine judged to be in default.

“The only real problem is that these negotiations may stretch past the IMF board meeting in June,” said Taras Kotovych of Investment Capital Ukraine.