A debt arrangement would be an important way to prevent Ukraine from sinking into insolvency.
Ukrainian the economy has collapsed due to the major invasion launched by Russia in February 2020.
Russia has destroyed a lot of factories, power plants, roads and primary production in order to cause as much damage as possible to companies and households.
Due to the collapse of the economy, Ukraine is now trying to secure a restructuring of its debts to avoid insolvency.
At the beginning of the Russian invasion, international investors promised Ukraine a two-year payment exemption.
The exemption deadline ends at the end of August. Therefore, Ukraine is in a hurry to reach a debt settlement or a new agreement to freeze the payments due.
The Reuters news agency gathered key questions about the restructuring of Ukraine’s government debt.
Why is debt settlement very important?
Emergency financing from the International Monetary Fund (IMF) is conditional on Ukraine reorganizing its debt with private investors. Ukraine’s goal is not to be excluded from international financial markets.
If Ukraine fails to negotiate a debt restructuring or a freeze on payments due, it would trigger a default. As a result, many private investors would probably not be able to grant the government a loan for a long time.
How much debt does Ukraine have?
According to the Ministry of Finance of Ukraine, the government debt and guarantees increased in March to 151 billion dollars, or 139 billion euros.
According to the IMF, Ukraine’s public debt, including guarantees, will increase to 97 percent of GDP this year. In 2021, the debt ratio was 51 percent.
According to Reuters, the nominal value of international bonds issued by Ukraine is 19.7 billion dollars. Of the group loans, 11 are denominated in dollars and two are denominated in euros.
Based on the calculations of the investment bank JP Morgan, Ukraine owes international investors 23.6 billion dollars, taking into account the unpaid interest due to the freeze.
In addition, Ukraine has 2.6 billion dollars of debt, which is tied to economic restructuring and economic growth. Ukraine acquired this debt in 2015, when Russia occupied Crimea.
In total, the IMF and foreign countries have promised Ukraine emergency funding of 122 billion dollars.
What happens in debt settlement?
The debt arrangement would probably mean replacing Ukraine’s current bonds with new ones, the terms of which have been changed together with the creditors. More favorable conditions for Ukraine would be one way to avoid insolvency.
Debt restructuring usually takes several months and at most years.
Is there an alternative to debt settlement?
Ukraine can request an extension of time for the current suspension of installments and interest payments. Thanks to that, the state would have more time to negotiate the actual debt arrangement with investors.
Among the public creditors, for example Canada, France, Germany, Japan, Great Britain and the United States have promised freedom of payment for the loans they have granted until March 2027, according to Reuters.
What methods can be used in debt settlement?
The value of the Ukrainian government’s dollar-denominated bonds is currently around 30 percent of their nominal value. This means that investors consider the probability of default to be high.
According to JP Morgan, debt restructuring could mean extending the maturity of loans, partially “forgiving” debts, i.e. reducing the debt capital, reducing interest rates, paying off payments in the near future, or a combination of all of these.
How are negotiations with private creditors progressing?
Ukraine and its bondholders have already set up a committee to negotiate a debt restructuring. Sources familiar with the matter told Reuters that an agreement in principle should be reached by June.
The advisers to the Ukrainian government are the financial company Rothschild & Co and the law firm White & Case. The negotiations will primarily focus on the restructuring of government bonds and debts of state-owned companies.
Who are Ukraine’s biggest private creditors abroad?
Mainly large investment companies, such as Blackrock, Pacific Investment Management Company (Pimco), Fidelity and Alliance Bernstein, have invested in Ukrainian government bonds.
What is the state of public finances in Ukraine?
The government estimates the public finance deficit to be 37 billion dollars this year. The goal is to finance the deficit with a domestic loan and grants from Western countries.
According to the Ministry of Finance, Ukraine has received almost 12 billion dollars in financial assistance from foreign countries this year. In 2022-2023, the grant amount was $73.6 billion.
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