In the last 3 days, Ukraine's short-term bond prices have crashed 9%. Specifically the 2017s are down 3.5 points today alone following Ukraine's (American) finance minister threats yesterday in Washington that it will default on its debt unless creditors (which include both Russia and the US taxpayer) acquiesce to their demands for more aid (more debt). As Bloomberg reports, the country will stop making payments on its debt if talks don’t make progress, Finance Minister Natalie Jaresko told reporters in Washington Wednesday. Bondholders are “deeply concerned” about Jaresko’s stance, a creditor group led by Franklin Templeton said in a statement today.
The comments suggest a two-month impasse in negotiations is only hardening as coupon payments come due this month and a $500 million bond matures in September. As Bloomberg goes on to note,
“The positions of Ukraine and creditors are far-far away,” Gintaras Shlizhyus, a Vienna-based strategist at Raiffeisen Bank International AG, said by phone Thursday. “That makes me believe that we are talking about the prolongation of talks maybe even beyond September.”
Ukraine has two coupon payments due on sovereign bonds next week, including $75 million it owes by June 20 on a Eurobond that Russia bought from the regime of former President Viktor Yanukovych before he was overthrown in February 2014.
Jaresko has told creditors that a 40 percent principal writedown is needed to meet the objectives the IMF has set for the restructuring, a person familiar with the talks said on Thursday.
The minister has consistently said that bondholders must accept a writedown on principal as well as coupon cuts and maturity extensions, yet hasn’t previously revealed the details of her proposal.
“This puts the value of Ukrainian bonds at around 45, way below market levels,” Regis Chatellier, a London-based director of emerging-market credit strategy at Societe Generale SA, said by e-mail. “The hope for no haircut on Ukraine debt is/was unrealistic from the point of view of debt sustainability.”
The creditor group’s proposal includes extending maturities by as much as 10 years, temporarily lowering coupons and amortizing principal payments over seven years starting 2019, a person familiar with the proposal told Bloomberg last month.
Jaresko has rejected the offer on the grounds that it assumes Ukraine can make payments out of its reserves, something it says is illegal.
“Minister Jaresko has been in possession of a detailed IMF-compliant solution from the bond committee for over a month,” the committee said today. “We are ready and willing to start talks at any time.”
Finally, the hurdles continue Greek-like...
Ukraine must pass three bills relating to its IMF program before it can call a board meeting with the IMF to unlock the next tranche of a $17.5 billion loan from the Washignton-based lender, Jaresko said yesterday. Two laws relate to independence and structure of the central bank, while the third relates to improvements in the ability of the state oil and gas monopoly to collect receivables, she said.