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Ukraine Debt ‘Haircut’ Looms amid Hard Currency Woes

George Soros

The depletion of Ukraine’s hard currency reserves to just enough to cover five weeks of imports is threatening big government debt writedowns, rather than mere maturity extensions, being needed to put the country on its feet, Reuters said.

That is, unless international lenders beef up existing loan offers to plug an estimated $15 billion funding gap.

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A year of revolution and war has crippled Ukraine’s economy, pushing the hryvnia currency to record lows. There is little respite in sight.

So whereas Ukraine was until recently deemed to have a cash flow problem that exchanging shorter dated debt for longer maturities could fix, it is now seen as flirting with a flat-out debt crisis.

Billionaire financier George Soros, for example, has estimated Ukraine would free up $4 billion if it conducted “a voluntary, market-based” restructuring.

Others are seeing a writedown, or haircut, of near half or more of the debt’s value.

“(Maturity extension) was then, when debt-to-GDP was 40 percent. Now it is heading for 80-90 percent. The market is pricing a haircut of 45 cents but it will be worse than that, ” said Gabriel Sterne, head of global macro at Oxford Economics.

A lot will come down to what the International Monetary Fund decides — and it has begun indicating that it doesn’t want to be in the business of simply bailing out private creditors.

It has a mission in Kiev until Jan. 29 to negotiate the current loan package, worth $17 billion, and the government hopes the visit will lead to pledges of additional money.

Prime Minister Arseny Yatseniuk has said Ukraine needs an additional $15 billion of financial aid without which it could default.

The extra cash would help stabilize the currency and the economy — the main priorities ahead of debt negotiations, said Bank of America Merrill Lynch analyst Vadim Khramov, who estimates Kiev needs to pay around $17 billion in 2015 to meet its debt and gas payment obligations.

“The urgent goal is to stabilize the currency and the economy and then decide how to reprofile or restructure the debt, which can be done in an investor-friendly manner, ” he said.

The European Union and United States in the past week have each pledged an additional $2 billion to shore up Ukraine’s finances, but the moves have been overshadowed by heavy hints from Russia it might demand early repayment of a $3 billion loan.

Meanwhile the separatist conflict continues to cost Kiev $10 million a day and is distracting the government from its reform plans, required by Western backers in exchange for financial assistance, said Volodymyr Sidenko, an analyst at Ukraine’s Razumkov political research centre.

All foreign loans will be wasted unless the government tackles corruption and implements other promised reforms, he said, adding “It would be like throwing the cash into the stove to burn.”

In another development, Ukrainian President Petro Poroshenko met George Soros in Kyiv on Jan. 13 and agreed to continue their dialogue at the World Economic Forum in Davos, which will be held later this month, The Kyiv Post said.



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