10/2/16: IMF to Ukraine: Sort Thyselves!

IMF on Ukraine (and it is narsty):

The only surprising bit is the tone. It is quite frankly unbelievable to think that the IMF were rationally expecting substantial and visible progress on such a tough and 'sticky' issue as corruption to be delivered within such a short span of time. Their key concern is, of course, warranted. But the sharpness of the tone suggests IMF is entering into an internal political dogfight between Ukrainian Presidency and the Government and it is siding, seemingly, with the President.

23/6/15: Ukraine's Debt Haircuts Saga: One Step Forward, Two Steps Back

Two big setbacks for Ukraine in its bid to cut the overall debt burden and achieve targets mandated by the IMF.

First, Moody issued a note today saying that Ukraine will be in a default if it haircuts principal owed to private creditors. The agency said it believes Ukraine can deliver USD15.3bn in savings without haircuts. Ukraine believes it cannot. IMF backed Ukraine on this, but it is not to IMF to either declare a default even or not. Moody further noted that any moratorium on debt redemptions will have long-term implications for Kiev access to international debt markets.

Second, the IMF has signalled that private debt open to haircuts under Kiev-led negotiations does not include debt owed to Russia which is deemed to be official sector debt. This is not surprising, and analysts have long insisted that this debt cannot be included into private sector haircuts, but Kiev staunchly resisted recognising debt to Russia as official sector debt.

Incidentally, Ukraine debt to Russia is structured as a eurobond and is registered in Ireland, as reported by Bloomberg. The bond is structured as private debt, but Russia subsequently re-declared it as official debt. Re-declaration was somewhat of a positive for Ukraine, because a default on official debt does not trigger automatic default on private debt (the reason why the bond was originally structured as private debt was precisely the threat that a default on it will trigger default on all bonds issued by Ukraine). Ironies abound: IMF is happy to declare Russian debt to be official sector debt, because it takes USD3 billion out of the pool of bonds targeted for haircuts. This implies that for Kiev to achieve USD15.3 billion in savings, Ukraine will most likely need to haircut actual principal outstanding to private sector bond holders - something IMF wants Kiev to do. So here, too, Russian side gain is also Kiev's gain.

Ultimately, in my view, Moscow should write down the entire USD3bn in debt owed by Kiev. Because it would be ethical to do, and because it would help Ukraine. But that point is outside the fine arts of finance, let alone beyond the brutal realities of geopolitics.

More background on both stories: http://www.bloomberg.com/news/articles/2015-06-22/moody-s-backs-creditor-math-in-resisting-ukraine-debt-writedown.

30/5/15: Private Sector Counter-Proposal for Ukrainian Debt Restructuring

An interesting and far-reaching article on Ukraine's attempts to restructure some of its debts via Bloomberg: http://www.bloomberg.com/news/articles/2015-05-29/ukraine-creditors-said-to-offer-coupon-cuts-10-year-extension-ia9ao4ey

In the nutshell, Ukraine needs to restructure its debt per IMF three targets for debt 'sustainability':

• generate $15 billion in public-sector financing during the program period; 
• bring the public and publicly guaranteed debt-to-GDP ratio under 71% of GDP by 2020; and 
• keep the budget’s gross financing needs at an average of 10% of GDP (maximum of 12% of GDP annually) in 2019–2025

Note, these are different than what Bloomberg reports.

Key difference, however, is the matter of Russian debt. S&P note from February 2015 addressed this in detail: see more here: http://trueeconomics.blogspot.ie/2015/04/15415-s-ukraine-ratings-and-reality.html. In simple terms, Ukraine's debt to Russia is not, repeat: not, a private debt. Instead it is official bilateral debt. As such it is not covered by the IMF programme condition for restructuring privately held debt regardless of whatever Ukrainian Rada or Government think. Full details of the IMF programme are linked here: http://trueeconomics.blogspot.ie/2015/04/7415-imf-ninth-time-is-gonna-be-lucky.html

As I noted in March note, "IMF has already pre-committed Ukraine to cutting USD15.3 billion off its Government debt levels via private sector 'participation' in the programme" (http://trueeconomics.blogspot.ie/2015/03/16315-ukraines-government-debt.html) Once again, Bloomberg 'conveniently' ignores this pesky fact about only private debt being covered.

Now, it appears we have the first private sector offer for restructuring. It is pretty dramatic, as Bloomberg note linked above outlines. But it is clearly not enough, as it involves no cuts to the principal. This is the sticking point because the proposal front-loads notional savings to the amount of USD15.8 billion, but it subsequently requires Ukraine to repay full principal - a point that is not exactly in contradiction to the IMF plan in letter, but certainly risks violating it in spirit. The chart below shows that beyond Q2 2017, Ukraine is facing pretty steep repayments of debt and there is absolutely no guarantee that by then Ukraine will be able to withstand this repayments cliff.

To further complicate issues, Ukrainian Parliament (Rada) passed a law last week that would hold off repayments of debt until there is an agreement with private holders on haircuts. This presents three key problems for Ukraine:

1. The law can be used to hold off on repaying Russian debt, which is not private by definition and as such will constitute a sovereign default on bilateral loans. This will be pretty much as ugly as it gets short of defaulting on IMF.
2. The law, if implemented, will also halt repayments on genuine private debt. Which will also constitute a default.
3. If Russia refuses to restructure its debt (for example, citing the fact that it is non-private debt), Rada law will have to be applied selectively (e.g. if Rada suspends repayments on Russian debt alone), which will strengthen Russian position in international courts.

In case of default, be it on Russian debt or on private debt, or both, Ukraine will see its foreign assets arrested. Which involves state enterprises-owned property, accounts etc. The reason for this is that Rada has no jurisdiction over laws governing these bonds, which are issued under English law. In addition, Ukrainian banks - big holders of Ukrainian Government debt - will be made insolvent overnight as the value of their assets (bonds) will collapse.

Final point is that ex-post application of the law, there will be no possibility for achieving any voluntary restructuring of debt as all negotiations will be terminated because Ukraine will be declared in a default.

While Greece continues to attract much of the media attention, the real crunch time is currently happening in Kiev and the outcome of this crisis is likely to have a significant impact across the international financial system, despite the fact that Ukraine is a relatively small minnow in the world of international finance.

Here is Euromoney Country Risk assessment of Ukrainian credit risks:

Ukraine score is 26.30 which ranks the country 147th in the world in creditworthiness.

7/4/15: IMF: Ninth Time is Gonna be Lucky in Ukraine

It is perhaps revealing that the IMF is being forced to defend its Ukraine package 2.0 only a month after it was unveiled. And even do so without providing any explicit risk assessments. Here is the latest on the Fund efforts on this front. Lipton's full speech is here: http://www.imf.org/external/np/speeches/2015/040715.htm

Of note two things:

1. This is an 9th lending programme by the Fund to Ukraine, with 8 previous ones being... err... not exactly successful.
2. The current programme is based on (see details here: http://www.imf.org/external/pubs/ft/scr/2015/cr1569.pdf) assumed 2015 real GDP contraction of 5.5%, growth of 2% in 2016, 3.5% in 2017 and 4% every year thereafter through 2020.  And below is the table of forecasts from the Central Bank of Ukraine (NBU) showing 2015 forecast for -7.5% growth and 2016 forecast for 3% growth. It also shows that NBU estimates y/y growth in Q4 2014 to have been -14.8% and Q1 2015 growth to be -15%. And that -7.5% growth in 2015 will require positive growth in Q4 2015 and a relatively modest contraction in Q3 2015.

All of which suggests that the Fund leading 'assumption' on growth might be a touch optimistic. And that makes its leading 'target' for debt/GDP ratio of 94% at year end 2015 to be a touch unrealistic. Just as the Funds' all previous leading assumptions and targets that the IMF set in all previous lending arrangements with Ukraine.

But, as the Good Director might say, this time it is different...