UKRAINE CLOSE TO DEAL WITH ITS CREDITORS.

Reports from Kyiv indicate that Ukraine is close to restructuring its foreign debt owed to private creditors (Financial Times, Reuters, January 24-28). Should it go through, this deal–which was brokered by the IMF–would ease Ukraine’s cash-strapped finances. It could also have broader implications for debt restructuring in Russia and other countries. The Ukrainian government and its investment banking advisors (led by ING Barings) are preparing to present the terms of the proposed swap of some US$2 billion of Ukrainian debt due in 2000 and 2001 into new government securities. The debt to be swapped includes a Euro 500 million bond which matures in March 2000, a US$74 million bond due in October 2000, a 1.54 billion Deutsche mark bond maturing in February 2001, US$258 million outstanding on a zero coupon bond due in September 2001, and another US$280 million in state obligations for the settlement of Ukraine’s debts to Gazprom for Russian gas supplies. The new bonds, which would be denominated both in Euros and dollars, are said to have a maturity of seven years, carry a 10 percent interest rate, and provide a two-year grace period on the repayment of principal.

Should Ukraine’s bondholders accept the deal, Kyiv would manage to lift its most pressing debt service obligations and thereby avoid the threat of default on its obligations this year. According to the Finance Ministry, Ukraine must repay US$3.1 billion in foreign debt this year, and the National Bank of Ukraine only had US$1.25 billion in foreign exchange at the end of 1999. A successful bond restructuring would then allow Kyiv to begin negotiations to reschedule its obligations to the Paris Club of official creditors, as well as to the Russian government.

The expected terms of the deal seem to satisfy most of the private holders of Ukrainian debt. But since the new bonds are expected to trade at a steep 40 percent discount on their face value, creditors will be unable to fully “cash out” of their investments. Some of the creditors could therefore still prove unwilling to accept the exchange, and could declare Ukraine in default before the swap is consummated. Because Kyiv failed to make two payments worth US$20 million in January in anticipation of the swap, its creditors would be well within their rights to invoke a default. Russia’s experience with its creditors, however, suggests that Ukraine’s bond holders are unlikely to take the risk. Among other things, a default on Ukrainian eurobonds could send shock waves through the international financial community and depress the value of other bonds held by these investors.

If an agreement to swap old debt for new is completed, the financial spotlight in Ukraine will shift to the Verkhovna Rada, which is currently debating the 2000 budget. A vote on the budget is scheduled for February 15. Passage of the budget is expected to lead to the renewal of disbursements (which have been frozen since September) of IMF credits under the US$2.6 billion Extended Fund Facility. The resumption of IMF funding in turn is expected to lead to disbursement of additional funds from the World Bank’s US$170 million lending facility for Ukraine. The prospective removal of the threat of a sovereign default, and the promise of new credits for Kyiv, would be a strong signal of international support for the economic reform program promised by Prime Minister Viktor Yushchenko’s new government.

WOULD A UKRAINIAN SWAP BE A MODEL FOR RUSSIA’S RESTRUCTURING?