Why Ukraine’s Debt Relief Doesn’t Match Financing Needs

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Since Russia’s invasion in February, Ukraine has had to radically rethink its finances and ask private creditors for debt relief. As Europe’s largest ground conflict since World War II drags on, destroying vital infrastructure and shutting down swaths of the country’s economy, the Kyiv government remains under intense pressure. He has repeatedly said he faces a monthly shortfall of around $5 billion in public finances, far more than his allies have so far been able to commit to.

1. What is the state of Ukraine’s external debt?

Ukraine won permission from a majority of its investors to freeze about $20 billion in payments on its international bonds for two years, covering both principal and interest. The debt process is backed by Ukraine’s key allies, including the United States and the International Monetary Fund, as the country needs the money for everything from paying pensions to defending against its aggressor much more. taller and richer. Ukraine relied mainly on central bank funding and the sale of so-called war bonds and depleted its foreign currency reserves during the conflict.

Its economy could shrink by a third in 2022 as tens of thousands have been killed, millions have fled the country and many factories have been destroyed or taken over by Russian forces. Damage to ports and other infrastructure severely hampered exports. Along with the international bond deal, the government also secured consent from creditors to amend the terms of $3.2 billion in so-called GDP warrants, debt instruments tied to the country’s gross domestic product. or economic growth. Separately, Ukrainian state-owned companies Ukravtodor and NPC Ukrenergo have also received creditor approval for similar debt freeze agreements.

3. How did Ukraine get here?

After Russia annexed Crimea and stoked military conflict in its neighbor’s eastern provinces in 2014, Ukraine fell into a recession that made its debt unsustainable. After talks with international creditors, it completed an $18 billion private debt restructuring at the end of 2015. The terms included a four-year debt maturity extension, a higher average interest rate high and the agreement that creditors would accept an immediate loss of 20% on the face value of the bonds in order to avoid a default. To sweeten the deal, it also included so-called GDP warrants, with coupon payments adjusted according to the country’s growth rate.

4. What effect have these measures had?

With the support of international creditors and the IMF, Ukraine’s debt was on a sustainable path. It also allowed him to return to the capital markets, reconnect with investors and start selling bonds again. This all changed with the Russian invasion in February, when the country’s finances were thrown into turmoil and most funds were redirected to pay for the war.

5. Who are Ukraine’s main creditors?

The world’s largest private investors and leading members of the Paris Club are among Ukraine’s main creditors. BlackRock Inc., Fidelity International Ltd., Amia Capital LLP and Gemsstock Ltd. all hold Ukraine’s external debt, while Paris Club member countries include the United States, United Kingdom, Germany and France. The IMF has also lent a lot to Ukraine. Earlier in April, he created a new account intended to give donor countries a safe way to provide support to stabilize Ukraine’s economy while the war continued.

6. What are they doing about it?

The IMF approved a $1.4 billion emergency loan to support the economy in early March, days after the Russian invasion. It came after board members questioned whether they had wiggle room to approve more disbursements from a 2020 loan, which still had $2.2 billion to pay, based on political and economic uncertainty caused by the war, people familiar with the matter said at the time. . The Washington-based fund warned in the first weeks of the war that Ukraine’s economy could shrink by up to 35% in 2022, but said debt would remain sustainable if there was a quick end to the war. This military scenario has not materialized and shows no sign of doing so.

7. What obstacles does Ukraine face with the IMF?

The country has requested a new special loan program from the IMF, Prime Minister Denys Shmyhal said earlier in August, and expects to receive funds around November or December, although the amount is unclear. Ukraine may not be able to get the money from the IMF at all, based on an institutional principle that countries borrowing from the fund must have a clear path to repaying the organization so that it can lend to other nations. This is in doubt with Russia occupying parts of Ukraine, and factories and ports destroyed. However, it is clear that Ukraine may be an exceptional case. The IMF said in a written response to questions that it “continues to work closely with the Ukrainian authorities and is currently exploring all possible options to provide additional support.”

8. What should he do?

To obtain funds from any existing IMF facility, President Volodymyr Zelenskiy’s government must present a viable debt program, a standard requirement for help from the so-called lender of last resort. IMF management and members ultimately decide whether a country receives financial resources and could bend or break its own rules or precedents to help Ukraine, or the global financial firefighter could come up with new loan deals tailored to the moment. . But the uncertainty surrounding the country’s situation makes even the most basic forecasting tasks very difficult.

More stories like this are available at bloomberg.com

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