Soros calls on Ukraine creditors to agree to haircut

Ukraine is struggling to negotiate a deal with its creditors, which the International Monetary Fund (IMF) demands as a condition for further financial support. Russian aggression has taken a terrible toll on the economy of the new Ukraine, making its $19 billion in foreign debt unsustainable, Soros wrote.

Sovereign defaults are costly, the investor noted. They have lasting effects mainly when lenders drag out the battle, as they did in Latin America in the 1980s or in Greece today. But when a country and its lenders can reach a speedy deal, even one that imposes losses on lenders, the country is usually back in the market in a year or two. Moreover, it is not the default that briefly keeps the country out of the markets but the economic problems that caused the default in the first place, according to Soros.

Soros noted the recent efforts made by policy makers and academics to revive the idea of a sovereign-debt restructuring mechanism.

The argument that default ruins a country's reputation runs against the logic behind the U.S. bankruptcy code, which allows companies to "reorganize" their debts—often by imposing haircuts on their creditors – so that they can revive their fortunes, according to Soros. He writes that Chapter 11 assumes that forcing a heavily indebted company to pay its debts in full is bad for business, and that making debt relief easier can be good for business.

Soros wrote that Nicholas Brady, the chairman of Darby Overseas Investments, the private-equity arm of Franklin Templeton – Ukraine's largest bondholder – was former U.S. Treasury Secretary. In 1989 he unveiled the Brady Plan urging banks to accept debt relief, at least for those Latin American countries pursuing sensible reforms.

Now, according to Soros, it is difficult to reconcile Mr. Brady's position in 1989 with Franklin Templeton's position today, as the latter is pressing hard against debt relief.

The Ukrainian government is fighting heroically for the kinds of structural reforms that the Brady Plan called for in 1989: rooting out corruption, reforming the judicial system, reducing the country's dependence on Russian gas, integrating the economy into the European Union, boosting agriculture, cleaning up the banking system, and more.

"If debt relief can be a fillip to these reforms, then investors ought to demand it. If going into default is the only way to get debt relief, then investors will applaud, not condemn, Ukraine for doing it," Soros wrote.

As UNIAN reported earlier, Soros is confident that the economic sanctions against Russia that have been imposed by most developed economies in response to the Russian aggression against Ukraine, should be coupled with a comprehensive assistance to Ukraine in the implementation of structural reforms.