Ukraine’s Hard Bargaining Chips
After getting the first IMF $5 billion slice under its resumed program and passing energy reforms halfway to full market pricing, Ukraine’s bondholder negotiations opened with skirmishes placing in doubt the June agreement deadline around the next Fund review. Finance Minister Jaresko, who previously ran a private equity fund, rejected Franklin Templeton’s initial gambit with BlackRock advice for a simple coupon extension or re-profiling as proposed in the IMF’s new restructuring guidelines. To achieve the $15 billion relief from private debt operations as the linchpin of the latest facility, “hard” interest and principal haircuts are on the table according to participants and a taxonomy prepared by the Canada-based Center for International Governance Innovation in an April paper. It argues that war in the East has now overtaken the prospect for “soft” write-downs and that explicit loss-sharing will result in contrast with the past vague “bail-in” formula.
Resort to short-term maturity lengthening around 3 years in the Fund’s description presumes that market access and debt sustainability are restored over the period. The current indicators are poor on both fronts as foreign relationship banks refuse to roll over or agree to payment delays by the state Export-Import bank, and debt/GDP is widely estimated in the 100 percent range already, breaching the terms of Russia’s last-ditch Yakunovych regime rescue package. Sovereign default historians also point out that the country’s 2000 exercise when it was better positioned involved sizable coupon cuts. In CIGI’s view rescheduling must be stretched out for a decade and only principal reductions could be avoided in the preliminary phase. Numerous questions remain for the operation such as Russia’s creditor status it claims as official and the inclusion of foreign currency-denominated domestic Treasury bills. Ukraine may have also alienated investors with the choice of Lazard for its team after the adviser was behind the draconian Greece exchange. Rumors have circulated that Kiev could invoke covenant clauses to force any swap under local law jurisdiction following Athens’ playbook or that it may mount an “odious debt” defense repudiating the past decade’s contracts under corrupt rulers.
These uncertainties assign urgency to the broader restructuring agenda the Canadian think-tank outlined in a separate document. A 2014 UN resolution championed by Argentina urged a multilateral framework although this treaty response was soundly quashed in the early 2000s. However the UK and US which govern most emerging market debt opposed the move, and many issuers prefer the IMF as the guiding forum. Contractual response advocates for their part hail the collective action and pari passu clause cleanups last year as major strides. Kazakhstan went first with the changes and Mexico and Vietnam soon followed, but altering the terms for outstanding paper will take years. The CIGI has endorsed the parallel launch of a standing independent forum to address “incipient distress” and advance research and reform agendas. It would seek to modernize the traditional comparable treatment approach which non-Paris Club and new private creditors did not shape. The analysis also recommends strengthening the IIF’s code of conduct to shift the onus from debtors and more automatic standstills in the perennial confrontation literally extended to the CIS danger zone.
