Creditors abandoned Ukraine's debt restructuring plan: should we expect a default?

Given the creditors' demands that Ukraine start repaying its debts in August 2024, the Ministry of Finance has publicly offered investors the terms of restructuring 13 series of Eurobonds. So far, an agreement to defer the repayment of about $20 billion has not been reached due to the refusal of creditors. However, Ukraine's Finance Minister Sergii Marchenko said that negotiations will continue and expects an agreement to be reached by August 1. It should be understood that the threat of Ukraine's default is almost zero, as creditors are also not interested in this scenario.

Thus, on June 17, the Cabinet of Ministers publicly offered investors the terms of restructuring Ukraine's Eurobonds, the Ministry of Finance reported. "On June 17, the Ukrainian government publicly announced that from June 3 to June 14, Ukraine held closed meetings with representatives of the Eurobond Holders Committee, which includes large institutional and other long-term investors holding about 20% of Ukraine's Eurobonds. The purpose of the meetings was to discuss the terms of the restructuring of Ukraine's Eurobonds, which should take place by August 1, 2024, to collect market feedback and agree on a structure that would be satisfactory to all parties and allow Ukraine to achieve debt sustainability in accordance with the requirements of the IMF program," the statement said.

It is noted that the terms of the restructuring are proposed based on the IMF's baseline macroeconomic scenario. Ukraine's proposal is to exchange all 13 series of Eurobonds for either a series of fixed income instruments (ordinary bonds) and government derivatives (option 1) or a series of ordinary bonds (option 2).

According to the Ministry of Finance, both options provide for a nominal reduction of Ukraine's public debt by 25-60%, depending on the pace of the country's recovery during the period of the IMF program. This is 2027.

According to Reuters, because no agreement has yet been reached, Ukraine's dollar-denominated Eurobonds fell by 1.7 cents on June 17. At the same time, short-term bonds were trading at "problematic" levels of 25-30 cents.

According to the agency, bondholders said that Ukraine's offer called for a write-down that was "significantly higher" than the 20% expected by the markets. They added that the offer "could cause significant damage to Ukraine's future investor base and set a primary goal of returning to capital markets at the earliest opportunity."

Ukraine's official negotiations with bondholders have been going on for almost two weeks. In the coming weeks, the Ukrainian government will hold consultations with Eurobond holders outside the Eurobond Holders Committee and gather feedback from the wider investor community on the structure of the deal and instruments, the ministry said. An agreement with investors on the terms of the restructuring is expected by August 1, 2024.

"Strong armies must be supported by strong economies in order to win wars. Ukraine has demonstrated extraordinary resilience in the face of Russia's full-scale invasion, and our economy has exceeded all expectations. But this is a delicate balance that depends on continued consistent and significant support from our partners. A timely debt restructuring is an important part of this support," said Finance Minister Serhiy Marchenko.

As Ivan Us, an expert in international economics, explained in his commentary to OBOZ.UA, Ukraine will not default in August. Firstly, because the negotiations on the state debt regarding Eurobonds have not yet been completed and there are great chances to agree on a restructuring. Second, because Ukraine's partners are interested in preventing the country from defaulting.

Therefore, even if the debts have to be paid, Ukraine will be able to raise funds to do so. "Our partners who are helping Ukraine are also interested in Ukraine not defaulting. The entire financial architecture of the world – the International Monetary Fund, the World Bank, and other institutions – is designed to prevent defaults... I do not expect Ukraine to default simply because our partners will not allow Ukraine to default," Us emphasized.

As reported by OBOZ.UA, Ukraine's national debt has exceeded UAH 6 trillion, which is a historical record. In foreign currency terms, the amount is $151.5 billion. However, according to experts, the situation remains under control. The issue of repayment of the bulk of the debt will be resolved after the war is over, and there is hope that Russia will bear financial responsibility.

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