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19 August 2017
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As with Greece, Ukraine debt swap may not be last word - Reuters

Bondholders cheering Ukraine's debt swap face the risk that Kyiv will return to the bargaining table within a few years, following the path Greece trod after its 2012 restructuring, according to Reuters.

Unlike Greece, Kyiv has made economic reform a priority / Photo from UNIAN
Unlike Greece, Kyiv has made economic reform a priority / / vseoboi.ucoz.com

"This may not be the last chapter in the Ukraine debt saga. As Greece or Argentina show, sometimes restructurings don't work out," said Peter Marber, head of emerging debt at Loomis Sayles who has participated in more than 25 sovereign restructurings, Reuters reports.

Both the debt writeoff and the repayment extensions were far less than predicted, a pleasant surprise for fund managers who had prepared for bigger losses on their Ukraine bond holdings.

The deal, which aims to cut Ukraine's debt to 71% of GDP by 2020 from an estimated 100% now, was further sweetened by higher interest rates to be paid on the bonds and the promise of additional payouts after 2020, if economic growth hits certain targets.

But given the dire state of Ukraine's economy and its conflict with pro-Russian rebels in the east, there are some parallels with Greece, which now wants yet more debt relief, while another defaulter, Argentina, is fighting court battles with a minority of bondholders who refused to accept a restructuring deal.

Ukraine's restructuring is modest compared with the EUR 172 billion ($191 billion) that Greece defaulted on in 2012. Proportionately, its debt is also nowhere near as dire as Greece's, which is equivalent to about 160% of GDP.

And unlike Greece, Kyiv has made economic reform a priority.

Three years later, Athens says its economy can never recover without more debt relief, having just clinched a third bailout worth 86 billion euros.

Its problems partly stemmed from the fact that debt owed to official creditors - European institutions and the International Monetary Fund - was untouched in 2012, says Jakob Christensen, an Exotix strategist.

That's so in Ukraine too. Only foreign currency bonds worth $23 billion, including the debt of state-owned enterprises, are affected out of total public sector debt estimated by the IMF in March at $71 billion. Multilateral and bilateral lenders such as the IMF were spared, as were holders of local currency debt .

"The job wasn't done fully in Greece but that was to do with the official sector. In Ukraine, the job has not been done fully in the private or the official sector, so both may be on the hook (for restructuring) down the road," Christensen said.

But unlike Greece, which owes money to European bailout funds, Ukraine's main official creditors are the IMF and World Bank which rarely forgive debt. So if Ukraine returns for another bite, private creditors may be at risk again.

Ukraine's Finance Minister Natalie Jaresko has defended the deal as
Ukraine's Finance Minister Natalie Jaresko has defended the deal as "win-win" and it may yet turn out to be so / Photo from UNIAN

Kyiv-based analysts such as Oleksandr Valchyshen at Investment Capital Ukraine saw the deal as positive, even if it fell below expectations, arguing it was now up to the government to achieve the targets.

Ukraine's Finance Minister Natalie Jaresko has defended the deal as "win-win" and it may yet turn out to be so.

The generous deal will undoubtedly smooth Kyiv's return to bond markets and allows the IMF to continue its loan program.

One alternative, a debt default or moratorium, would have sent bonds plunging, risking luring in distressed debt funds that can pursue a country for decades in international courts, as Argentina has witnessed.

"If I were the authorities, I'd rather have some agreement now with the risk of another restructuring in few years rather than fight for additional debt relief at the risk of not achieving an agreement and declaring a moratorium," said Claudia Calich, a fund manager at M&G Investments.

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