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.

Ukrainian parliament passes legislation to meet IMF austerity and other demands

The Ukrainian parliament yesterday passed a budget that is designed to balance the books and carry out a plan that is required and backed by the International Monetary Fund.

The plan for 2015 passed after a marathon debate in parliament that only ended after 4 a.m. President Poroshenko even made an unannounced visit to the parliament Sunday in order to convince disgruntled members of his coalition to support the legislation. There has been widespread opposition to the austerity measures as shown on the appended video. Even though there were almost 1,000 people outside the parliament with flares lit protesting against the austerity measures the vote was a lopsided 233 in favor to only 27 against. However before the vote the Prime MInister Arsenly Yatsenyuk promised that deputies would have an opportunity to change some of the most unpopular policies on February 15, but only on condition that any changes be approved by a visiting IMF team.

An IMF team is scheduled to send a mission to Ukraine on January 8th and will stay the rest of the month. Many legislators complained that the government did not provide them with details of the budget before calling the vote. Yulia Tymoshenko, a former prime minister but now part of the ruling coalition said: "After voting for laws that radically changed the revenues and expenditures parts, we do not have the draft budget in our hands." Included in the budget was $5.7 billion for defense. Poroshenko promised to boost defense spending from under 2 percent of GDP as it is now to 5 percent

Among the most unpopular austerity measures are a 10 percent increase in duties on alcohol and tobacco and many food items as well. Given the drastic drop in the value of the currency, the hryvnia, this will make imported goods quite expensive. Many other items will have a 5 percent increase in customs duty. To raise revenue, the budget includes provisions for the state to open up casinos and allow online gambling. The government has spent much of its foreign currency reserves in an attempt to stop the decline in value of the hryvnia. Reserves are at a 10-year low. There are only reserves sufficient to pay for two months of imports.

While defense spending will more than double social benefit payments will be increased only in line with inflation. Help in paying utility and other bills will be cut off entirely. The budget deficit is projected at 3.7 percent in 2015. Natalie Jaresko, the Finance Minister, who is an American citizen, said all measures had been agreed with by the IMF and that most measures would be repealed in 2016. The IMF approved a $17.1 two-year loan back in April. There were austerity conditions imposed as part of that loan that the parliament had agreed to back in March: It took two readings of the bill for 246 MPs out of 321 registered to approve the austerity measures outlined in the legislation dubbed “On prevention of financial catastrophe and creation of prerequisites for economic growth." The IMF had held back the last two payments until President Poroshenko came up with a restructuring plan that would stem the trend towards increasingly unsustainable debt. Even with the new measures rating agency Standard and Poor warned Ukraine may need another bailout of $15 billion next year to meet its debt obligations.