The debt negotiations between Ukraine and its western creditors have erupted into a furious public row.
The Ukrainian Finance Ministry released on 12th May 2015 an angry statement complaining that creditors are only interested in “liquidity” (i.e., repayment of their debts) not “sustainability” (i.e., debt restructuring involving substantial debt write-offs or ‘haircuts’).
A copy of the statement is attached below.
As discussed previously (see our discussion 26, Russia Insider, 21st April 2015), the IMF has given Ukraine until the end of May to agree repayment or restructuring.
As we also discussed in our previous article, Ukraine’s unwillingness to work with Russia and its attempts to find ways to avoid repaying the $3 billion loan Russia advanced to Ukraine in December 2013 have alienated Russia, which refuses to participate in any debt restructuring.
This in turn is making private Western creditors less willing to agree a debt restructuring either.
In the statement the Ukrainian Finance Ministry criticises the Western creditors for their lack of transparency and good faith and in particular for their refusal to disclose the identities of the members of the creditors’ committee.
The latter complaint should not be taken too seriously. Even if the identities of the members of the creditors’ committee have not been formally disclosed, it is inconceivable that Western governments, the Ukrainian government and the IMF have not been informed by their intelligence agencies who they are.
The refusal of the creditors’ committee to disclose the identity of its members does however show how bad relations between Ukraine and its creditors have become.
In the statement the Ukrainian Finance Ministry says, “An alternative to a negotiation cannot be in the interests of the bondholders.” That is a thinly veiled threat to default.
The problem with this threat is, as we discussed in our previous article, that it might actually be in the interests of the creditors to allow Ukraine to default in the expectation that a future Ukrainian government might one day repay in full Ukraine’s debts, rather than a restructuring that includes a substantial ‘haircut’ that the creditors might otherwise be stuck with in the future.
It is too early to say that the negotiations have failed. Ukraine continues to have support in the West and it is not impossible that the creditors could eventually be forced to agree a restructuring, even if that is not their wish.
However time is running out, and as the latest row shows, tempers are becoming short.
Statement of the Ukrainian Finance Ministry – published 12.05.2015 at 18:40 hours
Ukraine is committed to transparency, responsiveness and good faith in debt negotiations
The Ministry of Finance of Ukraine is concerned about the approach taken by the creditors’ committee representing the country’s external debt holders and their lack of willingness to engage in negotiations. An alternative to a negotiation cannot be in the interests of the bondholders.
The Ministry is determined to negotiate with the debt holders in a process which fully respects the commonly accepted principles of transparency, responsiveness and good faith.
Immediately after presenting the goals of the debt operation on March 13, the Ministry of Finance encouraged the debt holders to form a creditors’ committee to start a collaborative process in accordance with IIF principles. Despite numerous requests from the Ministry’s side, the committee refuses to reveal its membership, a highly unusual departure from standard practice in similar situations, and in stark contrast with IIF transparency and disclosure principles.
Minister Jaresko flew to the U.S. and the UK to meet with the largest debt holders after March 13. There have been numerous contacts and meetings between the Ministry’s advisors and the advisors to the ad hoc committee . Minister Jaresko proposed last week to speak directly with the one known committee member to accelerate and focus negotiations but was told that it was unavailable to talk to her.
3. Good faith
Even though Ukraine and the IMF have repeatedly said that the three targets for the debt operation (liquidity, sustainability and payment capacity) have to be met, the committee in its public statements focuses exclusively on the liquidity aspect, and refuses to acknowledge the debt sustainability objective. The Ministry is also concerned that instead of engaging directly in constructive negotiations, the committee chooses to communicate unconstructively through the media.
Ukraine and its debt holders need to agree on a sustainable debt level and debt service objectives meeting the targets of the IMF supported program by June. The Ministry remains convinced that a deal can be reached and that it is in the best interests of all parties to do so to ensure the country’s financial stability and debt sustainability. The Ministry is committed to transparency, responsiveness and good faith negotiations and expects the creditors’ committee to do the same.