Ukraine fails to secure debt write-off at US talks
Ukraine failed to convince its biggest creditors to significantly reduce its debt obligations during a ‘last chance’ two-day negotiation in San Francisco, California. The delegation from Kiev hoped to restructure some $19 billion in debt.
The Ukrainian delegation was headed up by Illinois-born Finance Minister Natalie Jaresko. Meanwhile, the creditors were represented by Franklin Templeton Investments, which holds about $8.9 billion worth of Ukrainian debt in the form of bonds.
The two sides said they had conducted “detailed discussions” in the city, but no progress has reportedly been achieved.
Even though there have been no official statements concerning the negotiations, Ukraine had previously asked for a 40 percent debt write-off, Bloomberg cited sources as saying. Reportedly, Franklin Templeton Investments was only willing to offer a 5 percent reduction to bond principal conditional on economic performance.
Ukraine described the talks near Templeton’s headquarters as the “final opportunity” to agree on something prior to next month’s due date for $500 million worth of bonds.
Even lobbying by influential US hedge fund billionaire George Soros, who recently had an article published in the Wall Street Journal titled ‘Ukraine Deserves Debt Relief,’ did not seem to make an impact.
In the piece, Soros argued that investors should stand behind Ukraine in its request for debt relief, which would help the country save some $15.3 billion in debt-servicing costs over the next four years as well as lower debt to below 71 percent of GDP by 2020. Ukraine must achieve those milestones if it hopes to take advantage of a proposed IMF bailout program.
The country’s GDP is expected to shrink 9 percent this year, with annual inflation expected to jump to 46 percent, the IMF has warned. The debt will hit 95 percent of GDP this year, according to the National Bank of Ukraine.
Kiev avoided a technical default earlier this month by making a $120 million coupon payment on its Eurobonds. The next key bond payment of $500 million is due in September.
Jeffrey Albert Tucker, Distinguished Fellow of the Foundation for Economic Education, told RT that Ukraine does not have the means to pay off its debt and could turn into another ‘Greece’ in a matter of months.
“Creditors are always in a bad situation under these conditions – there’s no money to be had, but they still want their money. But I actually think there’s no chance that Ukraine’s going to be able to pay what they owe, and 5% is not going to fix the problem… The creditors are going to have to take a bath this time... Six to twelve months from now we could be looking at another Greece,” Tucker said.
According to Tucker, the new Ukrainian government has done nothing to improve the debt situation, and now has to face economic reality. While default is likely, it would not be the worst thing in the world compared to the difficulties of austerity, according to the expert.
“The one thing you learn from international politics is that regimes can come and go, but government debt lasts forever unless there’s a default… Nobody wants a default, but if you can’t pay, you can’t pay. The Ukrainian economy is in a free fall and unless they can tap some more money from the IMF – I don’t see any another option. There’s no tax base that can possibly cover a debt this gargantuan.”
‘2 Americans negotiating fate of Ukraine’
One of the reasons the negotiations in San Francisco may have been so difficult is that the private holders of Ukrainian debt can hold out for a better deal, knowing that that their agreement to a settlement is required if Ukraine hopes to receive a desperately-needed loan from the IMF, according to political economy professor Jack Rasmus, of St. Mary’s College in California.
“The IMF will not provide its $17 billion second bailout package and the others won’t follow it, the other sources, unless Ukraine comes to some agreement with its private bondholders. That’s what’s holding it all up. And, of course, the bondholders know that they’re in the driver’s seat that way, and they’re stalling,” Rasmus said.
Although a similarly urgent bailout was recently approved for Greece, Rasmus points out that Ukraine has considerably less clout in negotiations because, unlike Ukraine, Greece’s economic fate is tied to that of the entire Eurozone.
“Because Greece, of course, is inside the Eurozone it had much more of a bargaining leverage with the rest of the eurozone countries. Ukraine really has very little… Who’s negotiating the deal here? You’ve got two Americans. You’ve got Natalie Jaresko, who’s an American citizen and head of a private equity firm who’s now the [Ukrainian] finance minister, and… on the other side, Nicholas Brady, who is an ex-treasury secretary, who’s the CEO of Franklin Templeton,” Rasmus observed, adding “So, it’s kind of two Americans negotiating the economic fate of Ukraine right now.”