Ukraine and its creditors hit another stumbling block Wednesday (5 August) after a new debt restructuring offer from Kiev and call for a “decisive” final meeting drew only a tepid response.
Talks to restructure $23 billion of Ukraine’s external public debt have dragged on for more than four months.
The Finance Ministry sent a fresh offer to a creditor group on Tuesday (4 August) and scheduled a “decisive” meeting for Thursday, but a source told Reuters that creditors saw the debt proposal as unacceptable and offered a meeting for early next week.
Ukraine has been pushed to the brink of bankruptcy by years of economic mismanagement, corruption and a conflict with pro-Russian separatists. An international bailout programme to shore up its finances depends on Kiev making $15 billion in savings via debt restructuring.
The cash-strapped former Soviet nation must strike a debt restructuring agreement before it is due to make principal and interest payments of more than $500 million on a Eurobond maturing on September 23.
“Failure to reach an agreement…early next week would force Ukraine to implement alternative options for financing its IMF-supported program,” the Finance Ministry said in a statement on Wednesday.
“Due to these constraints, it is also the last opportunity to reach a full agreement in advance of the September and October Eurobond amortizations and next IMF review now planned for September.”
Spokespeople for the creditor group declined to comment on the Finance Ministry’s latest statement.
Kiev has repeatedly warned it could call a moratorium on debt payments if an agreement is not reached soon. It has a coupon payment due in late August.
The bondholder group’s apparent rejection of the latest proposal suggests there is still little common ground between the two sides, which are at odds over the necessity of a writedown on the principal of the bonds.
Kiev insists a “haircut” of the principal is essential, but it is unclear if its latest proposal amends its original desire for a 40% writedown.
Washington called on creditors to swiftly reach a deal with the government, with a top U.S. official calling Ukraine’s debts “unsustainable.”
Reuters reported last week that the latest proposals from creditors envisaged a 5% haircut, in what seemed like a softening in their stance, although a source later said the proposal contains the possibility of no writedown if the economy picks up.
On Tuesday, the International Monetary Fund warned that protracted debt negotiations posed an exceptionally high risk to Ukraine’s financial recovery.
“Given the mood of the IMF report, and how far the sides still are from at least a 15% haircut (which would be an absolute minimum that the Ukrainian government would consider), … the risk of a moratorium is probably higher than 50 percent,” said Evghenia Sleptsova, an economist at Oxford Economics.
Economists believe that the current debt negotiations will thus determine how Ukraine slips into “technical default” next month.A deal would probably shield Kiev from being declared in default by the major global credit rating agencies and help keep its costs of borrowing down. Economists fear that failure to strike an agreement will push Kiev into unchartered territory in which it might even have its foreign assets seized.