Are creditors demanding that Ukraine repay its debts? What is really happening and is there a threat of default?

Ukraine and its creditors have begun consultations on the restructuring of the state debt. These negotiations are part of the International Monetary Fund (IMF) program and are expected to be completed by August. The consultations will not be easy, but Ukraine is definitely not facing a default - all the talk about it in the media has nothing to do with reality.

This was the explanation given by Danylo Hetmantsev (Servant of the People), Chairman of the Verkhovna Rada Committee on Finance, Taxation and Customs Policy, to a high-profile article by The Wall Street Journal (WSJ). The fact is that Ukraine's official G7 creditors have postponed debt payments until 2027, but the deferral for Eurobonds expires in August 2024.

"All options - extension of the deferral or a full-fledged restructuring with partial servicing and write-off - are on the table. The negotiations will not be a cakewalk - that's a fact - but I have no doubt that they will end in a deal in the coming months. So let's exhale, we are definitely not talking about any full-fledged default now," said Hetmantsev.

In addition, an agreement with Ukraine's external creditors is part of the IMF program, which has pledged to provide its expertise and an umbrella for such negotiations. According to the EFF program, Ukraine should save $11.8 billion on external debt payments by 2027, including $4.6 billion in 2024.

The MP explained that the news, citing anonymous WSJ sources, spread in the information space on Easter, May 5. It said that the holders of Ukrainian Eurobonds want Ukraine to resume servicing its obligations next year in the amount of up to $500 million per annum in interest payments.

However, the article also noted that if the parties do not agree on the terms of the restructuring, Ukraine may default after the current debt holiday expires in August."For the sake of hype, some media and TV channels emphasized the latter, i.e. a possible default, which since the late 90s has been the usual threat in Ukraine in any event," Hetmantsev said.

In fact, a possible deal on Eurobonds and GDP warrants includes two options. These are:

• extension of the deferral (similar to the one that Ukraine agreed with the Paris Club and the G7 countries)
• a full-fledged restructuring with the issuance of new longer-term securities, which may involve writing off a certain part of the debt in exchange for extended compensation and guarantees for creditors (including debt service).

"Any "insights" about the upcoming deal and conclusions based on them about what is beneficial and what is not beneficial for Ukraine are pure speculation. Those who are at least a little aware of how restructuring operations work know how complicated this process is, which involves financial and legal advisors on both sides working under a non-disclosure agreement (NDA). Obviously, the non-resident holders of Eurobonds, mostly represented by investment funds and insurance companies, expect that this will be a full-fledged restructuring. However, while negotiations are underway, they cannot say this publicly in detail because of the NDA. But if there is a partial "leak" to the media, that's fine. This should be taken as an element of market pressure. We'll see how it goes, the consultations are ongoing," said the MP.

In addition, at least 2/3 of the Eurobond holders (at least 50% for each issue) must agree to the restructuring. The WSJ article referred to investors controlling 20% of the debt.

"The only thing that can be said with certainty is that the probability of a full default, when the parties do not agree on a restructuring at all, is minimal at this stage... Obviously, Ukraine continues to be in exceptional circumstances due to the full-scale war and will not be able to service the Eurobonds on market terms after the August deferral expires. Under what conditions it will be able to do so is a matter of negotiation, where a separate aspect is the use of Russian assets (income from them) as a guarantee/partial source of repayment of external debt service in the future," Hetmantsev said.

He reminded that there is no such thing as a "useful default". "Since 2016, Ukraine has been building trusting relations with commercial external creditors, acting as a predictable borrower even in such difficult conditions as now," the MP summarized.

As OBOZ.UA previously reported, the head of the European Central Bank Christine Lagarde issued a statement condemning the US proposals to use Russia's frozen assets to finance military aid to Ukraine.

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