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Friday, 18 September 08:59 (GMT -05:00)



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Ukrainian Default Is Coming. Is It That Dangerous?


Today’s situation around the talks between Ukraine and its lenders resembles an action movie.  The thing is that Ukraine owes 15,4 billion dollars and wants to restructure or delay it to some extent since the country cannot service its debt anymore. The situation started in March 2015.

 


The thing is that the Committee of Lenders wants to stay incognito while the Ukrainian Department of Finance wants to know the list obviously to address the lender individually to ask them to restructure the debt.  As the result, the 2 parties keep on exchanging claims and blaming each other for the delayed  talks while Ukraine is nearing a default.

The situation is really difficult and unstable. The threat of a default has already created panic and rumors in the Ukrainian stock market. Will the talks end up in debt restructuring? Is the potential default as terrible as it is described?

It should be noted that last year, international lenders (including G7 nations and the IMF) lent Ukraine some 9 billion dollars while Ukraine had to spend 14 billion dollars on servicing its external debt.

This year, Ukraine is obliged to pay its lenders around 10 billion dollars. This amount doesn’t include the money owed to public companies. The terrible thing is that the debt exceed Ukraine’s currency reserves. On top of that, Ukraine will have to pay some 30 billion dollars of external debt within the next 4 years, not to mention 17 billion dollars of internal debt.

Apparently, such huge figures urged the Ukrainian authorities to seek new loans to cover the old ones.  Still, under such circumstances it is getting harder and harder to implement this ambitious goal.

The lenders do not want to restructure the Ukrainian debt on the conditions offered by the Ukrainian side. They are willing to extend the payment period but do not want to cut down on the amount of money. At the same time, Ukraine wants the lenders to write off 40% of the debt.

While the IMF is willing to keep on supporting Ukraine irrespective of the results of the debt talks, the Ukrainian financial authorities want to resolve the issue before the IMF Board of Directors holds the forthcoming meeting planned for early July 2015.

At this point, it seems like the default probability is a trump card up the Ukrainian sleeve. In particular, the Ukrainian government initiated a bill, which was approved by the Ukrainian parliament at a record-breaking speed. This happened after the authorities realized that the lenders will be hard to persuade.
This is going to be the very trump card allowing Ukraine to press the lenders. The newly-approved bill allows the government to suspend the debt service, i.e. to announce a default.

Still, some experts believe that this bill allows the government to default on its debt but doesn’t urge the government to do it. Some of them assume that the likelihood of Ukraine defaulting on its debt is under 15%. Even though the talk as still underway, they assume that the parties will eventually agree on the issue to find a solution to avoid the default since it is not beneficial for both Ukraine and its lenders.

At the same time, the path towards restructuring may turn out to be much longer than expected. If the situation goes out of control (which is unlikely) and the Ukraine does default on its debt,  the dispute between Ukraine and its lenders will turn legal. At the same time, Ukraine will face limited access to the capital market to attract more funds. Apparently, no default can serve as a means of escaping from the debt burden. The debt will be still there as the sides are discussing the ways of covering it.

Some experts say that plain folks may benefit from a default since in this case altogether they will owe less money to the lenders. Still, such a default (if any) may and will result in some major negative consequences for the country since no potential lender will ever want to lend to a country which fails to service its debt.

The bottom line that while Ukraine is nearing the default it is unlikely to face it, since the lenders aren’t fools and understand the situation. With that said, the parties are most likely to compromise at the last minute.

 

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