Kiev Holds Talks With International Money Lenders: This Month is Decisive

Time is running out for both parties to reach an agreement as a June 15 – the International Monetary Fund (IMF) deadline for the restructuring approaches. Ukraine is to restructure the $ 40 billion bailout. It must meet the mid-June deadline by which it must find a way to save $15 billion (13.7 billion euros) over four years. 

It’s hard to say what the authors of the aid package hoped for. Only private credits and loans may be revamped. As international practice has it, the financial aid provided by international organizations and states is not subject to restructuring if the state money lenders do not meet the debtor half way on their own will. The International Monetary Fund and some other actors make up a group of privileged lenders. The Fund never changes the initial conditions the aid was provided on. It never agrees to reduce the amount of debt, deadlines to foot the bill, or interest rates. 

$ 20-21 billion of Ukraine debt fall on private lenders. So, the authors of the package (looks like the offer is done by only one organization – the International Monetary Fund) want private lenders to write off around ¾ of the total debt. The mission is hardly accomplishable. Not all private lenders take part in the talks with Ukraine. According to media reports, a group of private lenders (funds and organizations) hold only $8-8, 5 billion. The majority of private Ukraine’s sovereign debt holders are left out of negotiation process. It’s unusual. According to common practice, at least 80% of lenders should be involved in talks to make them fruitful. The overwhelming majority of debt holders should give their consent for restructuring. Ukraine is eager to achieve an agreement with the IMF and other lenders. The $15.5 billion debt restructuring is a critical part of the plan for financial stabilization. There is no chance to succeed. It’s just no go. First, because those who are parties to the talks account for the amount of debt which is twice as less as the total sum of $15, 5 billion. 

Second, the leading US negotiator is Franklin Templeton known as a financial vulture (it holds around $7 billion of Ukrainian debt). Normally vultures block restructuring agreements. For instance, vulture funds obstruct the restructuring of Argentine’s debt. At the beginning of this century, Argentina declared default on its $100 billion. As a result, restructuring that took place in 2005 and 2010, the economy started to bounce back. Some US hedge funds bought Argentinian bonds almost for free, but wanted the debt to be serviced in full and in time. The vultures went to the New York court to sue Argentina for the whole amount without restructuring. In October 2012 the United States Court of Appeals for the Second Circuit (New York) ruled on the pari passu clause that required they receive full payment. Argentina had to pay off $1, 3 billion to hedge funds (vultures). A few days ago a US district judge ordered Argentina to pay $5.4 billion to some 500 creditors seeking repayment on the same favorable terms given to other holders of the South American country's restructured debt. Totally they hold $28 billion of total debt. According to the ruling, by refusing to make payment to some hedge fund and individual bondholders of its defaulted debt, while making payment to other creditors, Buenos Aires was in violation of an equal treatment provision in its contracts. 

Now back to Ukraine. Franklin Templeton is playing an unusual role. This fund is known for tearing up agreements, not reaching them. Imagine a wolf turning into a lamb agreeing to endorse the plans to revamp the part of the debt he holds. Now what about other private lenders? They hold at least $ 12 billion. The list has not become public domain, but there is a reason to believe there are no lambs there, only wolves chomping at the bit for an agreement on restructuring the Ukraine’s sovereign debt to tear it up afterwards. An economist understands that the talks on debt restructuring won’t lead to the desired outcome. But the hopes for Franklin Templeton miraculously turning into a lamb have been dashed. A debt restructuring deal for Ukraine seemed far off on Friday, June 5, after its finance ministry and creditors accused each other of a lack of engagement in talks and Kiev dismissed the offer from bondholders as unacceptable. After the conference call, the Finance Ministry expressed regret that the creditors' plan remained unchanged. “The Committee's proposal to offload their sovereign claims into the books of the National Bank of Ukraine is unacceptable as it assumes using the National Bank of Ukraine's reserves, in clear violation of Ukrainian law", it said in a statement. The only mission a central bank of any country is responsible for is the rate of national currency. Looks like money lenders want Ukraine to become a testing ground for new ways of using financial schemes designed to alter the established rules defining the policies of central banks, change the centuries-old practices of tackling the problems of sovereign debts and undermine the fundamental principle of private property. 

So far Kiev has refused to comply but how long will it resist the pressure?