In mid-June, Ukraine asked its creditors to write down 40 percent of the sovereign bonds they held so that the country could meet the IMF’s bailout terms.
However, the bondholder committee ruled out any haircuts.
Ukrainian Finance Minister Natalie Jaresko also said that the creditors had refused to aid Ukraine in its recovery and warned that Kiev would stop debt payments unless the talks saw progress.
Ben Aris, editor-in-chief of the media company Business New Europe, however, explained to Radio Sputnik that negotiating with the bondholders in not a top priority for the Ukrainian government.
“When the government should be concentrated on fixing what is absolutely, chronically broken economy, it is in meltdown, they are spending their time dealing with bondholders which don’t have to make a deal,” he said.
“They should be concentrating on reforms, fixing things,” he added.
“I just don’t see why the IMF didn’t come up with the extra $5 billion in the first place in order to free the governmentj in order that they could deal with this first rather than having these impossible talks with the bondholders.”
“You can see Ukraine’s arguments: what they are trying to avoid is that sort of extended pretend solution that is being used in places like Greece where the debt keeps mounting. It is just you put off the payment on the hope that sometime in the future. the economy will be flourishing and that you can pay the debt out of the income which is much larger.”
“You basically indebt future generations, in that case. So, they’ve [Ukrainian government] taken quite a pragmatic line: let it just happen now and deal with it now and not indebt future generations.”
However the bondholders, he explained, are taking a very reasonable line: we have invested in sovereign debt which is guaranteed by the country and why should we pay for the disaster that is the Ukrainian economy. You lend this money in good faith, we want our money. However we are prepared to wait rather than take it lost, we are prepared to pay the money we invest and get back the interest rate later.
And the precedent was set by Russia itself, said Aris, when in 1998 it technically defaulted on its bonds by putting a moratorium on payment for five years. And in the end everybody got their money back and they got profits, they got interest payments on that, they just had to wait a bit longer.
“So, it comes down to this principle decision: are the bondholders responsible for the mess, should they participate in the losses because of the economic problems; as at the end of the day, they invest with all these risks involved. Or, should the government be open to what they [the bondholders] want to see – just the delay and pay the money, but pay it several years later.”
Aris however explained why it might not work in Ukraine as it worked in Russia years ago:
“I think that Ukraine is going to dissolve,” he therefore warned. “The bondholders are holding out, they refuse to have a haircut, there is no reason why they should have a haircut, they don’t have to. And the terms of the bonds are such that they can refuse this pill that is being offered to them.”
“And it is important because if Ukraine defaults on official debt, then the IMF under its own rules may not lend to Ukraine anymore. And it would scuttle the whole bailout program. But if they impose their haircut program on bondholders than why would any bondholder buy Ukrainian bonds ever again?” he asked, rhetorically.
