Technical Default or Death Sentence for Ukrainian Economy?

Technical Default or Death Sentence for Ukrainian Economy?

Situation in Ukraine has been leading up to this for a long time and it has finally happened. A default was formally registered on 23 September – the day that the European Committee of the International Swaps and Derivatives Association (ISDA) adopted its resolution on Ukraine confirming the country’s technical default.

Similar verdicts were issued by a number of rating agencies. The international rating agency Standard & Poor’s, for example, declared that Ukraine was in selective default (SD) for its debts in foreign currencies after issuing a statement in the third ten-day period of September that it might downgrade Ukraine’s credit rating to ‘D’ – a full-fledged default.

The ISDA is an international non-governmental organisation that was established in 1985 and has its headquarters in New York. It brings together the major players in the global financial market – banks and funds. The association’s standing committee is made up of 15 global giants – Bank of America, BNP Paribas, Deutsche Bank, Goldman Sachs, JPMorgan Chase Bank, Morgan Stanley & Co. International and others. All 15 voted unanimously for the resolution on Ukraine. The decision by the global financial industry giants was a hair-trigger reaction to the Government Decree No. 978-p signed by Yatsenyuk on 22 September imposing a moratorium on the repayment of $500 million of Eurobond debt that was due on 23 September. The moratorium was deemed to be a technical default by Ukraine on its external obligations.

It is not very clear, however, why the ISDA is referring to the Ukrainian moratorium as a technical default. In international practice, such a default is commonly regarded as the failure of a country to fulfil its external obligations, which is agreed with creditors. It is sometimes also referred to as a technical default if a debtor delays in the payment of money to service and repay debt.

You may be asking yourself, didn’t Kiev agree on the restructuring of its sovereign external debt with creditors? After all, such a restructuring was gleefully announced by Prime Minister Arseniy Yatsenyuk and Finance Minister Natalie Jaresko back in August. So: their statements are worth absolutely nothing. According to international practice and customs, debt restructuring is considered to have taken place if it has been agreed to by the debtholders responsible for at least 75 per cent of the total debt claims calculated at face value. With the so-called restructuring of Ukraine’s sovereign external debt, this condition was not met (according to my own estimates, an agreement was only reached on roughly half the debt). Kiev decided to ignore many of the serious holders of Ukrainian Eurobonds, apparently hoping that Washington, as a patron of the Kiev junta, would put pressure on independent holders of Ukrainian securities.

Events then developed like this. The repayment of current liabilities to the tune of $500 million did not happen by the deadline given to Kiev. On 2 October, the last business day before the decree by Yatsenyuk’s government regarding its refusal to pay its debts came into legal force, the ISDA, behind closed doors, came to the final decision to recognise Ukraine as being in technical default on its over-the-counter assets. This became known on 3 October. The decision by the ISDA’s standing committee was officially made public on Monday 5 October.

The association continues to act clearly and firmly, since the Ukrainian government’s moratorium has a direct impact on the interests of its members. The only softening of the ISDA resolution’s wording was to call it a ‘technical’ default. In actual fact, it is a full default. The veil provided by the term ‘technical’ will soon be removed and creditors will begin a vicious battle for the satisfaction of their claims on Ukraine.

The default could result in serious losses for some members of the ISDA not because they are holders of Eurobonds issued by the Ukrainian government, but because they sold such holders credit default swaps (CDS). JPMorgan Chase Bank, for example, actively trades in this kind of business. The owners of this bank are afraid of a default in Ukraine even more than Yatsenyuk and Jaresko. The bank was obliged to vote in favour of recognising a default in Ukraine, however, thus agreeing to the fact that it would have to pay considerable compensation to the holders of Ukrainian Eurobonds. Next, JPMorgan Chase Bank will start skinning Ukraine alive. It stands to reason that other ISDA members will also take part in this.

It is hard to say which of the world’s moneylenders will have the sharpest teeth when they rip apart what is left of Ukraine, but I think that the greediest in this pack of moneylenders will be the investment funds that buy up the debt securities of various governments for next to nothing and then start demanding that the issuing governments redeem them at par. Financial vultures are famous for knowing how to break sovereign debt restructuring agreements. This is exactly what they did with Argentina, which managed to carry out two restructurings over the last decade with great difficulty, allowing it to reduce its sovereign debt by approximately $100 billion.

Ukrainian Eurobonds were actively bought up by the American fund Franklin Templeton, and this fund was central to the group of creditors that held talks with the Ukrainian government on the restructuring of its debt. At the start of negotiations, there was $7.6 billion of Ukrainian Eurobonds in the fund’s portfolio. Some were puzzled: was it possible that the wolf had turned into a lamb? It was this metamorphosis that was announced by Kiev when it reported that restructuring was allegedly being carried out successfully and Ukraine’s debt had been reduced by 20 per cent.

It is all a bluff, however. Washington has been making great efforts to try and force Ukraine’s creditors to meet Kiev half way. More specifically, the White House has been working with the financial holding company BlackRock Inc. In terms of controlled assets ($4.77 trillion), it is the largest financial corporation in America and possibly the world. US Treasury Securities (former Treasury Secretary Lawrence Summers and the current Treasury Secretary Jacob Lew), the Chair of the Board of Governors of the Federal Reserve System Janet Yellen, and other important bigwigs all have links with BlackRock. In turn, BlackRock is a shareholder of the previously mentioned fund Franklin Templeton.

In short, the White House put pressure on BlackRock, BlackRock put pressure on Franklin Templeton, and Franklin Templeton caved in and agreed to the debt restructuring. The White House failed to achieve what it was hoping for, however. Firstly, the White House does not have any links to many of the holders of Ukrainian debt securities, so failed to enlist the 75 per cent required for the restructuring to be recognised as legitimate. Secondly, BlackRock and Franklin Templeton have only been feigning their loyalty to the White House. The selfish interests of financial vultures always come first and they are much less interested in politics, if they are interested at all.

According to a number of sources, Franklin Templeton gave Ukrainian Eurobonds to the hedge fundsAurelius and Elliott while talks were going on between Kiev and its creditors. They fall outside the effective control of the White House and intend to squeeze Ukraine dry. Similar to what they did and what they are still doing to Argentina. These funds are called ‘independent international collectors’ and their services are used by a number of respectable banks and funds that have no desire to spoil their reputation, but at the same time want to make as much money from their debtors as possible. The whole business with the ‘restructuring’ of Ukraine’s debt shows once again that the US administration has no control over the financial situation in Ukraine. It is one of Washington’s extremely sensitive weak spots.

Transferring the debt claims into the hands of ‘independent international collectors’ is an even greater threat to Ukraine itself. Foreign creditors are about to embark on their rampant looting. The consequences of this could be disastrous. Kiev is trying to close the country’s border to stop the outflow of capital, but given the rampant corruption these days, this is unlikely to work. At best, the foreign currency accounts of individuals and companies will be frozen and at worst they will have their currency confiscated. The last formal attributes of sovereignty could be eliminated. The Ukrainian government could be replaced by some kind of ‘temporary administration’ consisting of representatives of the main creditors (similar to appointing a temporary administration in a bank when a bank is declaring bankruptcy). Claims will be satisfied by privatising what remains of the country’s state-owned property.

There is no point in expecting much from privatisation, however. Creditors will turn their attention to the recovery of Ukraine’s external assets, primarily state-owned assets, of course. The West’s attitude to Ukraine could change dramatically. Foreign courts will rubber stamp decisions on the confiscation of Ukrainian assets in favour of creditors, and when the government’s external assets are exhausted, they will start on private assets, i.e. those that the Ukrainian oligarchs stole during the years of ‘reforms’ and moved outside of the country.

So the ISDA’s announcement regarding Ukraine’s ‘technical default’ is the cue for financial vultures and other financial industry tycoons to start stripping the country of its assets. Barring a miracle, the Ukrainian economy could be destroyed completely.