Post by Admin on Aug 1, 2024 13:01:26 GMT
On August 1 a debt restructuring deal expires and the government will have to pay back all the suspended interest payments for the last three years in one go. If forced to pay the whole amount, it will result in an unprecedented increase in public debt servicing costs to 6.3% of GDP, or almost $12bn in 2024.
That is a payment the government cannot afford to make. A lack money is one of the three M problems – men, money and materiel – Ukraine is facing, as recently detailed by bne IntelliNews. Ukraine once again passed a 2024 budget with a whopping $43bn deficit that will be two-thirds funded by Western donors and one third with expensive short-term domestic treasury bill issues (OVDPs).
Taken together, if the bond interest payments resume, then together with payments on Ukraine’s GDP warrants and servicing its growing IMF debt, then almost half of the money donors have promised for Ukraine’s budget this year will disappear, going on debt servicing payments.
MinFin says it needs at least $3bn of international grants and loans a month to cover the spending, but even MinFin admits that Western funding is likely to halve over the next two years, making it increasingly difficult to pay for the war with Russia. Resuming debt payments now will only accelerate that process.
A default is not a given as the $3.5bn Eurobond interest payment is included in this year’s budget. But clearly the government would rather spend the money on guns and civil servant salaries.
The government is scrambling to cut a new restructuring deal and asking for investors to take a 60% haircut, as the state can barely afford to run the war-time economy, let alone repay its pre-war borrowing obligations.
The talks are not going well. Ministry of Finance (MinFin) has already been forced to drop the haircut demand to 40%, but bondholders are digging their heels in and offering no more than 22%.
Before the war, Ukraine has a healthy debt-to-GDP ratio of 48.9% at the end of 2021. The average rate of debt service was about 9% per annum on domestic debt and 4% on foreign debts. The total cost of debt service was equal to 2.9% of GDP.
But that has all changed since the war started. Debt-to-GDP was 80% at the end of 2023 and is already an estimated 97.6% this year, according to the Wilson Center, as more of Ukraine’s donors switch from grants (that don’t have to be repaid) to loans (that do).
And a lot of money is at stake. The deferred bond payments amount to 15% of Ukraine's GDP annually. If the payments were to resume they would become the government’s second largest budgetary expenditure after defence.
The IMF is pushing the government to persuade the investors to agree to a haircut, but it looks increasingly unlike an agreement with the investors can be struck in time. If Ukraine is forced to declare a default, it will indicate an alarming lack of faith among private investors in the West's commitments to continue to support Ukraine.
And Ukraine already has to pay about $900mn in interest to service the IMF debts this year, but after receiving $5.4bn in loans from the IMF in 2024, Ukraine will need to increase IMF debt service payments in 2025 up to $1.1–1.2bn.
Without an agreement, Ukraine has two options. One of them is to agree on extending the moratorium, as has been done with official creditors, until 2027. Another option is to declare a default.
That is a payment the government cannot afford to make. A lack money is one of the three M problems – men, money and materiel – Ukraine is facing, as recently detailed by bne IntelliNews. Ukraine once again passed a 2024 budget with a whopping $43bn deficit that will be two-thirds funded by Western donors and one third with expensive short-term domestic treasury bill issues (OVDPs).
Taken together, if the bond interest payments resume, then together with payments on Ukraine’s GDP warrants and servicing its growing IMF debt, then almost half of the money donors have promised for Ukraine’s budget this year will disappear, going on debt servicing payments.
MinFin says it needs at least $3bn of international grants and loans a month to cover the spending, but even MinFin admits that Western funding is likely to halve over the next two years, making it increasingly difficult to pay for the war with Russia. Resuming debt payments now will only accelerate that process.
A default is not a given as the $3.5bn Eurobond interest payment is included in this year’s budget. But clearly the government would rather spend the money on guns and civil servant salaries.
The government is scrambling to cut a new restructuring deal and asking for investors to take a 60% haircut, as the state can barely afford to run the war-time economy, let alone repay its pre-war borrowing obligations.
The talks are not going well. Ministry of Finance (MinFin) has already been forced to drop the haircut demand to 40%, but bondholders are digging their heels in and offering no more than 22%.
Before the war, Ukraine has a healthy debt-to-GDP ratio of 48.9% at the end of 2021. The average rate of debt service was about 9% per annum on domestic debt and 4% on foreign debts. The total cost of debt service was equal to 2.9% of GDP.
But that has all changed since the war started. Debt-to-GDP was 80% at the end of 2023 and is already an estimated 97.6% this year, according to the Wilson Center, as more of Ukraine’s donors switch from grants (that don’t have to be repaid) to loans (that do).
And a lot of money is at stake. The deferred bond payments amount to 15% of Ukraine's GDP annually. If the payments were to resume they would become the government’s second largest budgetary expenditure after defence.
The IMF is pushing the government to persuade the investors to agree to a haircut, but it looks increasingly unlike an agreement with the investors can be struck in time. If Ukraine is forced to declare a default, it will indicate an alarming lack of faith among private investors in the West's commitments to continue to support Ukraine.
And Ukraine already has to pay about $900mn in interest to service the IMF debts this year, but after receiving $5.4bn in loans from the IMF in 2024, Ukraine will need to increase IMF debt service payments in 2025 up to $1.1–1.2bn.
Without an agreement, Ukraine has two options. One of them is to agree on extending the moratorium, as has been done with official creditors, until 2027. Another option is to declare a default.