Ukraine won a decisive battle this week.
Not on the battlefields with Russia, but in the economy with its Western creditors. Prevent the country from going bankrupt.
After months of negotiations, the government in Kiev has reached an agreement on a “haircut” with the main holders of $23.3 billion in Ukrainian bonds due on August 1. Leading the group of creditors with whom Kiev had to negotiate were BlackRock and Pimco.
Funds around Amundi, Blackrock, Fidelity, Pimco and Co.
They agreed to a 37% reduction in their original $23.3 billion loan. In effect, this means the lenders will write off $8.67 billion.
Ukrainian Finance Minister Serhii Marchenko said Kiev expects to save $11.4 billion over the next three years through a combination of lower interest rates and extending the maturity of Ukrainian bonds.
Until recently, the Western investor group had said it would agree to a cut of no more than 20%. Kiev was demanding a haircut of 60%. Ukraine imposed a “freeze” on foreign debt payments two years ago after the Russian invasion began.
“As long-term investors in Ukraine, we are pleased to provide significant debt relief to Ukraine, support its efforts to regain access to international capital markets and advance the country’s future reconstruction for the benefit of the Ukrainian people,” a spokesman for the creditors said.
Some of the negotiators told the Financial Times that they considered the current situation too complicated because the war has been going on for too long and another delay would defeat the purpose entirely. “When we agreed to the moratorium in 2022, there was a possibility of payment. Now that we know the debt is unsustainable, it makes no sense to leave it for the future.”
“A drop in the ocean”
Economist Fredric Musso of the American Oakland Institute estimates, however, that this agreement is just a drop in the ocean:
“Even with this deal, Ukraine remains the IMF’s third most over-indebted economy,” Mousso said in an interview with the Berliner Zeitung.
“The $8.67 billion that was written off represents only a fraction of the total national debt of over $143 billion,” Musso stressed, adding that Ukraine borrows more than $40 billion a year for the needs of the military alone.
The agreement may prevent the bankruptcy of the Ukrainian economy for now, but it is not good for the population.
“The country’s debt to Western creditors has led to an ongoing drastic structural adjustment, which includes many costly measures for Ukrainians,” says Musso.
These measures include privatizing thousands of state-owned enterprises, reforming the pension system, cutting welfare programs, and eliminating subsidies for natural gas and energy.
“As if the loss of important public assets and social security systems were not enough, Ukrainians are also facing new tax increases that will further deepen poverty,” explains the New Zealand economist. “The situation for the population is catastrophic.”
“If the West really wants to help Ukraine, it should also hold its creditors accountable,” said Heidi Chow, executive director of the UK-based charity Debt Justice.
“Ukraine is defending itself against invasion. It should not be simultaneously defending itself against shameless bondholders trying to squeeze every ounce of profit out of Ukraine,” the British economist told the Guardian.
In any case, however, Kiev avoided a very important problem for its international financial strategy.
In the future, when the war stops and soldiers return to work, both the IMF and the Funds will be the “key” to how quickly war-torn Ukraine recovers.