On May 27, the Ukrainian government announced it would issue $1 billion worth of five-year bonds guaranteed by the US. The bond rate is 2.5 percent or less, and the payoff is due in 2020. Yield on the bonds will be paid annually on November 29 and May 29, starting November 29, 2015. The issuance is arranged by Citi, JPMorgan and Morgan Stanley.
Thus, despite the Ukrainian economy nearing default, the country will be able to attract money nearly at the rates of US treasuries, Lubomir Mitov, Chief Economist for UniCredit Bank AG, said. According to him, the bonds are not risky, and a major investment bank could buy them.
Alexander Zholud, economist for the International Advanced Research Center in Kiev, the current conditions for bond issuance are even more favorable than at the time when the country’s economy was stable.
Even though the country is on the brink of collapse, the bonds are guaranteed by the US Agency for International Development according to the loan agreement signed between the US and Ukraine on May 18, 2015.
Nevertheless, investors are "a bit shocked" by Ukraine issuing bonds, Vladimir Rozhankovsky, head of the analytic department of NordCapital, said.
According to him, the newly-issued Ukrainian bonds are risky and cannot be considered top-rated. Only funds which have already invested in Ukrainian bonds are likely to buy them again in a bid to return the money spent or to receive a bonus, he added.
As for sovereign national funds, they will not buy Ukrainian bonds, the economist said.
Rozhanovsky presumed that US guarantees might be used as a trick to persuade investors to give money to the Ukrainian economy. In fact, the US cannot provide guarantees endlessly, he noted.
Currently, the IMF mission is inspecting Ukraine’s obligations to the loan program. So far, Ukraine has failed to meet the demands.
On May 19, the Ukrainian Parliament adopted a law on foreign debt repayment moratorium, including settling a $3 billion debt to Russia. On June 20, 2015, Ukraine is due to pay off a $75 million coupon. The whole debt will mature by the end of the year.
According to experts, Ukraine is likely to find $75 million for Russia. However, default is possible by the end of 2015, especially if the IMF refuses to unveil another tranche of financial aid.
In April, annual inflation rate in Ukraine exceeded 60 percent. The country has a total of $4.5 billion due for debt repayment by the end of the year.
"I cannot understand why the US gives money to a potential bankrupt-state," Rozhankovsky said. According to him, the US would better give the money to Puerto-Rico and Detroit, or finance national railroads.
According to Mikhail Krylov, head of the analytic department of Golden Hills-Kapital AM investment company, even if Ukrainian bonds can be profitable for some investors, the US guaranteed them mainly due to political reasons.
