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Ukraine’s Creditors Offer A 5% Haircut

Ukraine’s international private creditors have proposed a 5% haircut. Last month Kiev asked the bondholders for a 40% debt relief worth about $15 billion.

ukraine map

The 5% debt reduction proposal was made this week by Ukraine’s largest creditor Franklin Templeton Investments. The investment house holds about $8.9 billion in bonds, according to two people close to the negotiations. It was also agreed by other major country’s bondholders.

Jakob Christensen, an analyst at Exotix Partners in London told Bloomberg the following:

“The creditors have bitten the bullet (…)

It’s give and take from here, so a compromise is probably the most realistic. I don’t think the IMF and the government will be satisfied with a small principal haircut. They will need more like 25 percent.”

Kiev has been trying to persuade foreign private creditors to make concessions as the country has to meet the conditions for the next $2.5 billion tranche of the IMF’s $17.5 billion loan. The next payment will be released only if the IMF is satisfied with the economy, budget and monetary reforms. The IMF board of directors will be meeting again to discuss Ukraine on July 31.

Concerns over the economy grow as it is struggling to recover from a recession and has been shaken by capital flight, as worried investors move their money abroad.

According to the IMF, the country’s:

  • GDP is estimated to shrink 9%
  • annual inflation is expected to reach 46%
  • the debt will jump to 95% of GDP

this year, following the calculations produced by the National Bank of Ukraine.

Last month Ukraine’s president warned his country was in a “colossal threat” that large-scale fighting could resume in the east, and said the military should be prepared to defend Ukraine against a possible invasion along its border with Russia.

Also Jeb Bush who visited Europe in June, expressed his concerns about Ukraine while his visit in Estonia. He said that the conflict in Ukraine is a “global issue.

Although Ukraine is in war fighting against the rebels supported by Russia in the Eastern Ukraine, which hugely contributes into economically and politically driven problems in the country, China seems to be active on the investment side in the region. In March Beijing promised to provide Ukraine with $15 billion in loans over 15 years to help support the construction of affordable housing.

The project is aimed at meeting the country’s public housing policy, of forming a social housing fund, constructing affordable homes, and improving the infrastructure.  Ukraine will implement a pilot $1 billion project to construct affordable housing.

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