Ukrainian authorities have announced plans to carry out another restructuring of external debt. Will this ease the debt stranglehold?
Last September, a moratorium was imposed on the payment of Ukraine’s external debt in order to mitigate the economic consequences of Russia’s war of aggression against Ukraine. It expires next spring. Ukraine wants to extend it. The IMF has already agreed, then negotiations with commercial creditors will follow.
The IMF has imposed a moratorium, what next?
In mid-September last year, Ukrainian Finance Minister Sergei Marchenko signed a Memorandum of Understanding and suspension of payments on government and government-guaranteed debt with a group of Ukraine’s official creditors from the G7 and Paris Club countries in order to mitigate the economic consequences of Russia’s war of aggression against Ukraine. It was signed by representatives of the governments of Canada, France, Germany, Japan, Great Britain and the United States of America.
With the moratorium set to expire next spring, the Ukrainian authorities announced plans to carry out another external debt restructuring by mid-2024 in a Memorandum of Intent to the IMF management.
“We plan to begin negotiations with commercial creditors with the goal of completing the necessary debt transaction no later than mid-2024,” says the memorandum.
The IMF has already supported the extension of the moratorium; it is up to commercial creditors.
The moratorium on the payment of external debt by the government of Ukraine to foreign countries is valid until 2027, and by mid-2024 a restructuring of commercial debt will be carried out. This was announced by the head of the IMF mission in Ukraine, Gavin Gray.
He noted that the IMF expects that the official moratorium of creditors will continue until the end of the program with the fund – until 2027. And the moratorium of private creditors, according to expectations, will end in August 2024.
“An ambitious restructuring of external commercial debt should be undertaken in the first half of 2024 to help restore debt sustainability while creating much-needed fiscal space,” he said.
As we see, there are no problems with the states that provided loans to Ukraine; the next task is to come to an agreement with commercial creditors.
Why is restructuring needed?
According to Alexander Okhrimenko, President of the Ukrainian Analytical Center the moratorium on the repayment of external debts existed in order to persuade the owners of our bonds not to demand their repayment during two years. There was an agreement that Ukraine would repay the loan amount but not pay interest. This extends the repayment period. Now they want to postpone payments for another two years in order to delay them even further.
Ukraine needs to do this because now, in conditions of war and lack of funds, we simply cannot pay interest on loans. Therefore, the Ukrainian authorities, seeking a deferment of repayment, are doing the right thing.
In general, debt restructuring is considered a normal procedure in the world, which is often used by different countries. More than 90 countries around the world have resorted to restructuring over the past few decades, and about 400 such agreements have been concluded.
“This is an absolutely massive phenomenon that was used very often, especially in conditions of systemic crises,” notes Alexey Kushch, expert at the analytical company United Ukraine
The restructuring will allow Ukraine to have the opportunity not to repay external debts for some time, and the owners of Eurobonds will receive new ones instead of old ones. As a result, Ukraine will be able to save several billion dollars, which will not need to be paid back right now.
Not only a delay, but also better conditions
At the same time, some Ukrainian experts believe that Ukraine should now, while the war is going on, negotiate not only a deferment of debt payments, but also better terms for restructuring.
So Kushch believes that the restructuring that the Ukrainian government achieved in 2022 was not ideal. Ukraine has not achieved debt write-off. We do not pay interest on loans; they continue to accrue.
But all is not lost. Right now, while the war is going on, Ukraine can negotiate restructuring on better terms. According to Kushch, it is possible to agree on writing off 50% of the debt, restructuring the remaining amount for 15-20 years and reducing government debt servicing to 2-3%.
“When the war is over, our creditors will be able to insist on payment of their debts. While it continues, it is possible to agree on restructuring on good terms, after the end of the war it will be more difficult to do,” says Kushch.
In his opinion, now we have a chance to achieve better restructuring. According to all IMF standards, if we look at the ratio of the debt flow to the budget or export indicators, that is, foreign exchange earnings that can be used to repay and service the debt, we can qualify for its write-off. We can start this procedure within the framework of the Paris Club of Creditors and within the framework of the London Club of Creditors. This is an interstate debt to international financial organizations, such as the IMF, World Bank, and EBRD. It can be called political, actually written off through negotiations with our allies. These organizations are quite loyal to debt forgiveness for countries such as Ukraine.
In turn, Okhrimenko believes that it is impossible to achieve better restructuring during the war.
In his opinion, in war conditions it is unrealistic to carry out a full-fledged restructuring; one can only declare a default and only then carry out restructuring. Perhaps they will do so. Now no one will seriously discuss restructuring with Ukraine. Too many problems have accumulated. There is no understanding of when the war will end and how much more money is needed, and most importantly, everyone understands that Ukraine will not be able to pay off these debts with its income.
According to the expert, the bad thing is that when the war ends, there will be no postponement of the repayment period and Ukraine will need to repay a very large amount of currency, it will be difficult to do. All hopes are for the confiscation of the seized assets of Russia.
Source: Korrespondent.net
