Ukraine may default on debt payment in July

Ukraine has found it necessary to obtain a further bailout from the IMF even though it had agreed to a $17 billion aid package last year, of which it has so far received $4.6 billion. It needed more in early 2015.

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In February of this year, in spite of the fact that the Ukrainian economy was in a tailspin and the IMF may never get its money back, a new bailout program was extended:The International Monetary Fund has agreed to give Ukraine a new bailout deal worth 15.5 billion euro ($17.5 billion) that could climb to around $40 billion over four years with help from other lenders like Europe and the U.S.. ..Facing bankruptcy, Ukraine last month asked the IMF to replace its program with a new one to restore confidence in its finances and help it meet its debt obligations.

As of March 5, the Ukrainian economy was getting worse: Its central bank raised benchmark interest rates from 19.5% to 30% effective Wednesday. Ukraine's currency, the hryvnia, has lost nearly 70% of its value against the dollar in just a year. GDP shrank by 7% in 2014. And while the war-torn country secured a $40 billion international bailout package in February, the chances of recovery any time soon are small.

Now Ukraine is facing a default as it will miss a $120 million bond coupon payment in July, setting off a default of approximately $19 billion in debt. There is no sign of a standoff between the government and creditors being resolved, according to Goldman Sachs. Ukraine is giving creditors just a few weeks to accept a proposal that includes a 40 percent write-down of the principal, or it will issue a debt moratorium. Imagine the international outrage and horror if the Greek government had set conditions such as that! The Greek government on the other hand has so far agreed to meet its debt obligations in full. Research analyst Andrew Matheny in a research note said:“Ukraine will not make the July 24 coupon payment and, as a result, will enter into default at that point. We do not expect the ad hoc committee to accept Ukraine’s latest restructuring proposal.”The committee, the Ukraine government, and the IMF officials will meet in Washington next week to decide whether the next slice of the $17 billion loan should be released to Ukraine. The IMF said earlier this month that it can keep supporting Ukraine even if it refuses to pay private holders of Ukrainian bonds.

Private bondholders have objected to a debt writedown. Franklin Templeton holds about $9 billion in Ukrainian debt. The company suggested extending bond maturity and reduction in coupon amounts as a means to saving about $16 billion for the Ukraine over four years. This is a variation on the type of scheme that Greek finance minister Varoufakis was suggesting as a means by which Greece could manage its debt. However, analyst Matheny of Goldman Sachs thought a debt writedown would be necessary.There are also proposals that bond repayment be linked to economic performance, a suggestion also made by the Greek government.

The Washington negotiations over the restructuring of Ukrainian debt are set to resume this next week. The IMF is demanding a lower Ukraine debt load before releasing more of the bailout money. This could mean "haircuts" for bondholders: Ukraine must restructure about $19 billion of debt held by international investors in order to secure another tranche of IMF funds. As a condition of the bailout, the IMF wants private debt restructured to save $15.3 billion over four years, and has urged Ukraine and its private creditors to find a compromise by June. As with Greek negotiations, the atmosphere is rather sour. A government minister claimed: “[The committee] has so far refused to contribute to Ukraine’s recovery. For three months, despite the urgency of our situation, they have refused to engage in substantive negotiations on the terms of a debt operation meeting the three targets established in the IMF program.” A spokesperson for the committee said this was an inaccurate description and that negotiations should start as soon as possible without preconditions and should emphasize solutions. The IMF will be urging the two sides towards finding a solution. As with Greece, the government may simply decide to walk away and default. However, if it does so, the west will surely find a way to save Ukraine.

Ukraine has not been spared the usual austerity conditions and reforms demanded for a bailout. Ukraine now has an American, Natalie Jaresko, as finance minister who was conveniently awarded citizenship on the day she was appointed to the job. She will help ensure the provisions of the bailout are met. Jaresko saysUkraine could default in July. There have already been violent demonstrations against austerity and economic conditions as shown on the appended video. The Ukrainian government could lose support very quickly if economic conditions do not improve.