“Ukraine has a month to avoid default,” the headline of an article in the respected British business publication The Economist sparked a new wave of panicky discussions of two words that are scary for Ukrainians: “default” and “devaluation.”
Is Ukraine really expecting a default in a month? What will this mean? And will the hryvnia fall from it? The Ukrainian Air Force studied alarming trends.
Why are people talking about default again now?
Two years ago, in August 2022, Ukraine’s creditors agreed to restructure its debts, in particular, to freeze payments on Eurobonds.
As the British Economist writes, if not for the restructuring, debt servicing costs would have been Ukraine's second largest expense item, after defense.
But Ukraine received only a two-year reprieve, because in August 2022 both sides - both Ukraine and its creditors - believed that the war would not last long, and that in 2024 Kyiv would be able to return to servicing its debts.
“Then the idea was that the war would end, and in two years everything would become clear, we would sit down and negotiate. But two years have passed, and nothing is clear,” financial banker Sergei Fursa explained in an interview with NV.
But the fact that the war will not end quickly, that Ukraine will not be able to pay off its debts for a long time and that a new restructuring is needed became clear already at the beginning of 2023, notes Alexander Parashchy, head of the analytical department of Concorde Capital.
The IMF even included this in a new $15 billion cooperation program with Ukraine, approved in March 2023, and subsequently began actively lobbying for a new deferment for Ukraine.
“Ukraine has no intention of paying according to the schedule that was agreed upon two years ago. The IMF allows us not to adhere to this schedule, and the IMF blessed Ukraine for new negotiations with creditors on a new payment schedule,” explains Paraschiy.
These negotiations, says the financial analyst, are being conducted around reducing the coupon rate of Ukrainian Eurobonds, postponing the maturities of all bonds and partially writing off the debt. Last Friday, the IMF released an updated memorandum after another revision of its cooperation program with Ukraine. It, Paraschey argues, actually contains all the parameters of a possible agreement with creditors: “the parties need to do very simple arithmetic exercises and check whether the terms they propose meet the criteria for debt sustainability, as the IMF sees it in its forecasts.”
At the same time, as Sergei Fursa notes, the IMF is now the toughest participant in the negotiations, and Ukraine is rather under its “umbrella”.
The IMF’s “patronage” of the agreement with creditors is important because the fund is also involved in the overall package of financial assistance from Ukraine’s international partners worth more than $100 billion.
“This amount already included approximately 15 billion in concessions from private creditors. They said – we bless you, just go and take these 15 billion from them in the form of deferments from payments that you should make, but, God willing, you won’t,” explains Alexander Parashchiy.
What debts are we talking about and why it is not possible to come to an agreement?
Sovereign creditors, that is, individual countries, under the “patronage” of the IMF, have long ago, back at the end of 2023, agreed to a deferment for Ukraine. But negotiations continue with private creditors - mainly investment ones, as well as pension funds and insurance companies from Britain, the USA, and France.
In June, Ukraine made its proposal: to reduce the cost of debt to 60%. This means that for every dollar invested, investors would now only receive 60 cents. Lenders responded that a 20% discount would be more acceptable to them.
“It’s like Putin saying that for peace you have to give up Zaporozhye, which he doesn’t even fully control,” says Fursa. As in any other negotiations, the parties first announce maximum positions, and agree somewhere in the middle, the financial expert believes.
The amount of debt is not exorbitantly large - just over $20 billion. But given the total lack of funds, its payment is not realistic for Ukraine.
All the income that the Ukrainian economy produces now goes to the army and security. Financial assistance from international partners - the EU, the USA, other countries and international organizations such as the IMF - goes to cover non-military expenses of the Ukrainian budget.
Earlier this year, the EU approved €50 billion in aid to Ukraine, with about $8 billion more to come from the US (out of a total $61 billion aid package approved by the US Congress this spring after a long delay). But even under these circumstances, Ukrainian Finance Minister Sergei Marchenko believes that next year the Ukrainian budget will be short of about $12 billion.
At the same time, for private investment funds, which are the owners of Ukrainian Eurobonds, we are talking about a smaller percentage in investment portfolios, says Alexander Parashchiy. But there are people who are responsible for these investments, and they cannot simply give up on them as they would on their own bonuses.
“They can’t do this at the managerial level,” explains the financial analyst. - That is, there are managers who are responsible for this investment, they advised to invest in these securities, and their superiors are now asking them where the money is. You have to get out of the situation, and they do everything they can to get the best.”
Will there be a default and will the hryvnia fall?
As the Economist writes in the mentioned article, while there is no agreement on restructuring, Ukraine has two options: continue negotiations until an agreement can be reached, as they agreed with sovereign creditors to freeze debt payments until 2027, or default.
“This may sound rather harsh, but in fact there is little difference between these two options,” writes the Economist. “In both cases, there will be no Ukrainian payments.”
In May, when consultations with private creditors began, the head of the parliamentary financial committee, Daniil Getmantsev, stated that there was no talk of default.
“The negotiations will not be an easy walk - that’s a fact, but I have no doubt that they will end with an agreement in the coming months,” the deputy said in an interview with the Wall Street Journal, assuring that “we are definitely not talking about any full-fledged default now.” According to Getmantsev, the options are either extending the deferment or a full restructuring with partial servicing and debt write-off.
“There is no option with a hard default. Ukraine doesn’t need this, the IMF doesn’t need this, creditors don’t need this, no one needs this. Therefore, there is nothing to be afraid of,” says Sergei Fursa.
In reality, the parties will either agree on a new restructuring or a new freeze on payments. That is, they will agree to negotiate to negotiate.
By and large, Ukraine has been in default since February 2022, because since then “only governments give us money and for political reasons, private creditors do not give us money,” says Alexander Parashchy. But, he notes, the word default “will be very popular in July and August.”
However, even in the event of a real default, that is, a formal recognition of the inability to pay obligations, the situation will not be anything extraordinary for Ukraine. Over the past 10 years, since Russia annexed Crimea, this will be the third time.
Of course, the letter D in the credit rating does not decorate the country, but, says Parashchiy, “we already have it.”
“When we did the 2022 restructuring, the rating agencies gave us this letter for a few minutes. When we did the restructuring in 2015, it was absolutely the same,” says the head of the analytical department of Concorde Capital, adding that the placement of Ukrainian Eurobonds in 2017-2018. showed that this did not greatly affect Ukraine’s ability to enter international capital markets when such an opportunity existed.
In general, the financial analyst believes, in Ukraine for a long time there has been a distorted attitude towards what a default is, and it is groundlessly associated with another terrible “D” word – devaluation.
“It is associated with the financial crisis that began in August 1998 in Russia. This crisis was provoked by the unlucky actions of the Russian government, unlucky monetary and exchange rate policies. But this crisis led to a threefold rise in the price of the dollar in Russia, and then moved to Ukraine. And this whole crisis was called the word default,” explains the financial analyst and assures: fears about the rapid fall of the hryvnia due to a default, even if it happens, have no rational basis.
