Mark Adomanis in Philadelphia -
The Financial Times' normally outstanding “beyondbrics” blog published an extremely curious article the other day titled “Ukraine's creditors are pushing it towards default“, written by David Clark, the chair of the Russia Foundation.
Now it shouldn’t come as a shock that Ukraine and its creditors are having a disagreement: as the country’s economy and finances have collapsed over the past year (output is down by roughly 10% while the hryvnia has lost more than 50% of its value versus the dollar), it has become increasingly likely that some sort of default was forthcoming.
By this point, in fact, some form of default (or “restructuring” if you prefer the parlance of the International Monetary Fund) is essentially inevitable. If you look at what Ukraine owes its creditors versus what its shrunken economy is able to generate in tax revenue, there’s just no politically realistic way to reconcile the two. The fact that a lot of the debt in question is denominated in foreign currencies also does not help matters.
Creditors can tell all the world about the importance of honouring previous agreements, but Ukraine simply is not going to spend the majority of its government revenue servicing past foreign borrowing. Principal haircuts or delays in coupon payments are coming, whether the creditors like it or not.
But precisely what the coming
default restructuring will look like is not an open and shut case. Obviously the creditors would prefer to change nothing, but when it comes to default restructuring there’s a huge spectrum of possibilities running all the way from “the creditors get nothing”, to “the creditors will eventually get all of their money, they will just have to wait a little while longer.”
And, as the FT story makes clear, Ukraine’s creditors are playing hardball (why they would be playing any game other than hardball is never made clear), coming into the negotiations with the position that there shouldn’t be any restructuring at all. This, of course, is a negotiating tactic. Everyone (especially the creditors!) knows that Ukraine can’t make all of the payments coming due. But by opening with that demand their position is clear: the restructuring of Ukraine’s debt should be extremely modest.
Ukraine’s government has other ideas. Some of the details are a little dicey, but based on media reports it sounds as if the new government in Kyiv is banking on $15.3bn in debt relief over four years. This “debt relief” is a large, but frequently unacknowledged, part of the IMF's “$40bn bailout,” though the exact amount that was anticipated through restructuring has fluctuated. When you compare Kyiv’s expectations of $15bn in relief versus the $19bn in interest and principal payments due over the same timeframe, you see just how far apart the two sides are.
Different banks have different estimates about precisely how large the haircuts would need to be to restore Ukraine to fiscal health. But the really interesting thing is that the FT article lambasted Ukraine’s creditors as Putin’s allies simply for doing their job. Does that sound too harsh? Well here is what the article said:
“Instead of trying to hold Ukraine’s feet to the fire in the pursuit of short-term gain, creditors should recognise their long-term interest in helping it to achieve financial sustainability. Tomorrow’s meeting should therefore be an opportunity for the IMF to inject some realism into this debate by making it clear that the only person who stands to gain from further uncertainty is Putin [my italics]”.
This is a remarkable misunderstanding of the role of Ukraine’s creditors. There is a suggestion that the creditors have some kind of interest in a prosperous, happy, “sustainable” Ukraine. They don’t. The creditors have an interest in Ukraine paying its debts on time to the greatest extent possible. That’s it. That’s what a creditor is. The people who own Ukrainian bonds didn’t buy those bonds for charity – they bought them because they calculated that they would be profitable investments. They have every right to try to make sure that that is the case! Rare indeed is it for the Financial Times to publish an attack on financial firms for having the temerity to try and make a profit.
Additionally, purely as a factual matter, there are plenty of people in addition to Putin who stand to gain from a deal that gives Ukraine very little relief on its debt obligations, namely the hedge funds who have been gobbling up Ukrainian bonds on the cheap. These funds are making a quite explicit bet that they will, in fact, be able to force Ukraine to honour its debts. Personally, I’m not sure I’d make that bet, but seeing the success that other, similar, funds have had with Argentina after its own default I can understand why it is a very attractive proposition.
Ukraine’s government needs to nurture as much goodwill as it can among Western financiers since its survival, to a large extent, depends on that goodwill. Inaccurately calling them Putinist stooges is a really poor way to start.
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