In Digest, Ukraine

RT.com, Aug. 15, 2015 Click on the weblink to watch a five-minute interview with U.S. professor of economics, Jack Rasmus.

Ukraine has failed to convince its biggest creditors to significantly reduce its debt obligations during a ‘last chance’ two-day negotiation in San Francisco, California. The delegation from Kiev hoped to restructure some $19 billion in debt.

RT interview with Jack Rasmus Aug 15, 2015

RT interview with Jack Rasmus Aug 15, 2015

The Ukrainian delegation was headed up by Illinois-born Finance Minister Natalie Jaresko. Meanwhile, the creditors were represented by Franklin Templeton Investments, which holds about $8.9 billion worth of Ukrainian debt in the form of bonds.

The two sides said they had conducted “detailed discussions” in the city, but no progress has reportedly been achieved.

Even though there have been no official statements concerning the negotiations, Ukraine had previously asked for a 40 per cent debt write-off, Bloomberg cited sources as saying. Reportedly, Franklin Templeton Investments was only willing to offer a five per cent reduction to bond principal conditional on economic performance.

U.S. Treasury Secretary Jack Lew meeting Ukraine Minister of Finance Natalie Jaresko in Kyiv, Jan. 28, 2015

U.S. Treasury Secretary Jack Lew meeting Ukraine Minister of Finance Natalie Jaresko in Kyiv, Jan. 28, 2015

Ukraine described the talks near Templeton’s headquarters as the “final opportunity” to agree on something prior to next month’s due date for $500 million worth of bonds.

Even lobbying by influential US hedge fund billionaire George Soros, who recently had an article published in the Wall Street Journal titled ‘Ukraine Deserves Debt Relief,’ did not seem to make an impact.

In the piece, Soros argued that investors should stand behind Ukraine in its request for debt relief, which would help the country save some $15.3 billion in debt-servicing costs over the next four years as well as lower debt to below 71 per cent of GDP by 2020. Ukraine must achieve those milestones if it hopes to take advantage of a proposed IMF bailout program.

The country’s GDP is expected to shrink nine per cent this year, with annual inflation expected to jump to 46 per cent, the IMF has warned. The debt will hit 95 per cent of GDP this year, according to the National Bank of Ukraine.

Kiev avoided a technical default earlier this month by making a $120 million coupon payment on its Eurobonds. The next key bond payment of $500 million is due in September.

Jeffrey Albert Tucker, Distinguished Fellow of the Foundation for Economic Education, told RT that Ukraine does not have the means to pay off its debt and could turn into another ‘Greece’ in a matter of months.

“Creditors are always in a bad situation under these conditions – there’s no money to be had, but they still want their money. But I actually think there’s no chance that Ukraine’s going to be able to pay what they owe, and 5% is not going to fix the problem… The creditors are going to have to take a bath this time… Six to twelve months from now we could be looking at another Greece,” Tucker said.

According to Tucker, the new Ukrainian government has done nothing to improve the debt situation, and now has to face economic reality. While default is likely, it would not be the worst thing in the world compared to the difficulties of austerity, according to the expert.

“The one thing you learn from international politics is that regimes can come and go, but government debt lasts forever unless there’s a default… Nobody wants a default, but if you can’t pay, you can’t pay. The Ukrainian economy is in a freefall and unless they can tap some more money from the IMF – I don’t see any another option. There’s no tax base that can possibly cover a debt this gargantuan.”

‘Two Americans negotiating fate of Ukraine’

One of the reasons the negotiations in San Francisco may have been so difficult is that the private holders of Ukrainian debt can hold out for a better deal, knowing that that their agreement to a settlement is required if Ukraine hopes to receive a desperately-needed loan from the IMF, according to political economy professor Jack Rasmus, of St. Mary’s College in California.

“The IMF will not provide its $17 billion second bailout package [March 2015] and the others won’t follow it, the other sources, unless Ukraine comes to some agreement with its private bondholders. That’s what’s holding it all up. And, of course, the bondholders know that they’re in the driver’s seat that way, and they’re stalling,” Rasmus said.

Although a similarly urgent bailout was recently approved for Greece, Rasmus points out that Ukraine has considerably less clout in negotiations because, unlike Ukraine, Greece’s economic fate is tied to that of the entire Eurozone.

“Because Greece, of course, is inside the Eurozone it had much more of a bargaining leverage with the rest of the eurozone countries. Ukraine really has very little…

“Who’s negotiating the deal here? You’ve got two Americans. You’ve got Natalie Jaresko, who’s an American citizen and head of a private equity firm who’s now the [Ukrainian] finance minister, and… on the other side, Nicholas Brady, who is an ex-treasury secretary, who’s the CEO of Franklin Templeton,” Rasmus observed, adding “So, it’s kind of two Americans negotiating the economic fate of Ukraine right now.”

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Ukraine creditors propose 5 pct haircut in new debt restructuring offer -source

By Karin Strohecker, Reuters, July 30, 2015

Ukraine’s biggest creditors have submitted a new debt restructuring offer to Kiev that proposes a five per cent writedown on the bonds’ principal, according to a source, softening their stance of outright rejecting a so-called ‘haircut’.

Negotiations to restructure $23 billion of debt have dragged on for more than four months because of the disagreement over writing down the principal of the bonds.

Earlier in the week, a group of Ukraine’s biggest creditors, led by U.S. asset manager Franklin Templeton, had sent a fresh proposal to Kiev, according to the source. “The proposal contained a 5 percent ‘haircut’ with conditions attached to it,” the source said, declining to elaborate on what the conditions were.

A second source confirmed a conditional proposal had been made but declined to give any further information.

“Following detailed negotiations, the committee has made a conditional proposal to forgive (subject to a number of preconditions and other detailed terms) a small portion of Ukraine’s debt,” said the second source familiar with the talks. “As long-term investors in Ukraine, the committee has led efforts to ensure a rapid, mutually acceptable and sustainable debt restructuring, while also retaining the country’s vital access to capital markets.”

Including a haircut marks a u-turn for creditors. But the five per cent writedown is still some way away from the 40 per cent Finance Minister Natalia Yaresko suggested was necessary to fulfill the conditions of a bailout programme led by the International Monetary Fund.

“It’s a positive step in terms of moving the process forward,” said Jakob Christensen, senior economist at Exotix. “Clearly the creditors have moved forward.

“But yes, it will not be enough. They would have to move further and it will be a give and take from here.”

On July 27, Yaresko said Kiev had made a new proposal to its creditors and was awaiting their response, though she declined to give any details of Kiev’s latest proposal.

The group of creditors, which includes T Rowe Price, BTG Pactual and TCW, holds $8.9 billion, or almost half the bonds targeted for a haircut.

Eurobonds have risen steadily over the past weeks on expectations that an agreement will be reached. The 2017 issue rose 0.875 cents in the dollar to trade at 56.750 cents in the dollar – its highest level in more than five months. The 2022 issue added one cent to change hands at 56.250 cents .

Bankers involved in the negotiations from TCW and BCG declined to comment on the status of the talks.

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