Ukraine’s Reshaped Restructure Deal Buzz
Ukraine shares recovered slightly from a 15 percent MSCI frontier loss and external bonds rallied to 70 cents as the Franklin-Templeton led private creditors group split the difference after acrimonious proposal exchanges and agreed on a 20 percent principal reduction and 4-year repayment delay. The breakthrough came after Finance Minister Jaresko and fund manager Hasenstab met for breakfast, and the IMF went ahead with another program installment and indicated continued support in the event of commercial default. A July coupon was honored but the parliament passed a moratorium law that would allow for formal non-payment if negotiations remained at an impasse. The $18 billion in obligations will be swapped into nine new instruments yielding 7.75 percent starting in 2019, with GDP warrants phased in should output exceed $125 billion. The same terms are expected for city of Kiev Eurobonds and other outstanding international loans, and the committee’s control of 75 percent of most issues should ensure acceptance. The distressed deal will trigger CDS payouts and the Fund forecasts a 70 percent debt/GDP ratio at end-decade with the relief and post-war economic rebound. However output fell 15 percent in Q2 with no end in sight to the Russian border fighting, and Moscow will not join the framework with its $3 billion bond in the throes of Yakunovych rule as it may be classified as senior status official debt in near-term formulations. A nominal cease-fire is still in place in the East, but Kiev refuses power decentralization in the absence of an election process there which would be difficult to conduct both logistically and financially with the widespread devastation and displacement. Thousands have fled the area to join the refugee march to neighboring countries and express no desire to return even with a durable peace until President Putin also leaves the scene.
Russian shares also slid into the negative column as the 2015 official GDP contraction was revised to 3 percent with the oil price slump and devaluation in China, the largest trading partner. Double-digit inflation may linger as the ruble resumed depreciation toward 70/dollar, and the central bank demurred on renewed intervention and benchmark rate changes. Sberbank under sanctions reported an NPL rise to 5 percent and lower profits as Probusinessbank, a top 50 institution, lost its license as other second-tier lenders embark on consolidation at regulators’ urge. Pension funds in turn have been exhorted to buy local currency corporate and government bonds and a state emergency fund separately aids with immediate rollover needs at home and abroad. Counter-sanctions have deepened with the destruction of Western food imports and removal of “unsanitary” consumer goods from store shelves. The President’s railway chief was reassigned and his spokesman was criticized for luxury dress as a Kremlin cutback campaign began to secure high popular approval.
Turkey’s share plunge was over 30 percent on leadership rejection in contrast as fresh November elections were called after two months of coalition efforts failed. The lira neared 3/dollar and the central bank provided foreign exchange relief on persistent capital and current account troubles. Fiscal balance could be endangered with campaign and military spending for anti-Islamic state and Kurdish rebel operations, and bank non-performing loans were up 25 percent in the latest period on hairy repayment and political prospects.
