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    Ukraine Still Unable to Pay Debts, Default Inevitable

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    Despite Ukraine managed to reach a deal with its international creditors, the country still has no financial capabilities to service its debts and is nearing default.

    While Ukraine is trying to proclaim a victory now that $3.6 billion of its debt has been written off, the country still owes $15.7 billion to its creditors.

    Recently, Prime Minister Arseniy Yatsenyuk announced private creditors had written off 20 percent of country’s debt. However, even if the Ukrainian government manages to persuade the creditors to write off state-guaranteed companies’ debts the total sum of the written debt will be around $3.8 billion.

    As a result, Ukraine will have to pay to its creditors some $15.7 billion instead of the initial sum of $19.3 billion.

    However, that Yatsenyuk proclaimed victory is seriously doubtful if one does the math, an author for Regnum news agency says.

    The creditors agreed to partially write off $3.6 billion and delay the due date for four years if Kiev raises interest from 7.22 to 7.75 percent.

    Before Ukraine struck the agreement, it had to return some $19.3 billion to its creditors within nine years (from 2015 to 2023) and pay interest of 7.22 percent on the sum ($1.4 billion a year). Thus, Ukraine initially had to pay a total interest of $12.5 billion. With the principal of the loan added, the total sum is now $31.8 billion.

    After the agreement was reached, Ukraine has to pay $1.2 billion per year to the creditors. At the end of 13 years, the sum will total $15.8 billion. With the principal of the loan added, it will reach $31.5 billion.

    As a result, the real sum that was written off was $323.4 million, 1.6 percent of the initial debt and this is not a victory, the author explains.

    Recently, Fitch downgraded Ukraine’s foreign currency rating from CC to C which means that default is imminent or inevitable.  According to the agency, the restructuring of Ukraine’s debt is expected to cause losses for creditors.

    Another problem is that the initial $19.3 billion of debt is only part of the debt, the money lent to Kiev and Ukraine’s state-owned companies. At the beginning of the summer, Ukraine owed $67.7 billion to all its creditors, with $43.5 billion borrowed from foreign markets. The point is that credits from international financial institutions (the IMF and others) and foreign countries cannot be written off.

    It is this reason why Russia has refused to write off 20 percent of Ukraine’s debt. With the deadline of December 20, 2015, Ukraine will have to settle bonds of $3 billion to Russia. If Kiev fails to do that, it will face an international trial, partial default and a D rating.

    It is obvious that Kiev currently has no money to settle its debts due the unravelling financial crisis. First of all, the Donbass Region, the most industrialized part of Ukraine, has not paid taxes to the budget for more than a year. Second, Ukraine has seen a disastrous decline in its manufacturing. In May 2015, the manufacturing activity in Ukraine dropped by 20.7 percent against May 2014.

    Protesters burn tires during a rally supporting a law on the restructuring of foreign currency loans in front of the Ukrainian Parliament in Kiev on May 21, 2015
    © AFP 2019 / YURIY KIRNICHNY
    In July 2015, the inflation rate compared with the same period in 2014 was 155.3 percent higher. Since 2014, Ukraine’s national currency, the hryvnia, has been devalued threefold.

    Finally, Ukraine’s GDP is continuing to decline. In the first quarter of 2015, it declined by 17.2 percent, in the second quarter – by 15 percent. Ukraine’s budget for 2015 was agreed on a 5.5 percent GDP drop with an inflation rate of 26.7 percent. A default in Ukraine is a matter of the nearest future, the author concludes.  

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    debt, GDP, economy, Fitch, Ukraine, Russia
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