It Begins: Ukraine Takes First Real Steps To Default

The Ukrainian government is on the brink of declaring default.

The Ukrainian government has proposed a bill allowing the government to impose a “moratorium” on payment of the country’s external debts.

Such a moratorium is just another word for a default.  

It is the same device the Russian government used when it defaulted on its external debt in 1998.

This is not quite the end of Ukraine’s debt saga. Ukraine will only be formally in default when it misses a payment.

It is possible Ukraine has taken this step as a negotiating tactic to put more pressure on its Western creditors.

It is also possible Ukraine is hoping to preserve some financial credibility by picking and choosing which creditors it will pay.  

As we have discussed previously, it might try to go on paying its Western creditors while defaulting on the debts it owes to Russia.

Frankly, this all looks unlikely and it seems that what we are looking at is an across-the-board default.

In truth, as has been pointed out by several people --- notably by Eric Kraus --- the numbers of the various IMF plans have never added up, and a default looked increasingly inevitable from the moment the Maidan coup happened, when it became clear the Ukrainian government was heading into a confrontation with its economically critically important eastern regions and with its biggest trade partner Russia.

The accelerating collapse of Ukraine’s economy (with GDP contracting by 17% in the first quarter by comparison with last year) and the deadlock in the negotiations with the Western creditors, appears to have made today’s default announcement unavoidable.

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The following Statement has just appeared on  the Ukrainian government’s website:

Statement regarding a draft Law on granting to the Government of Ukraine a right to impose a moratorium on repayment of external debts

19.05.2015 | 16:10 

Today the Government of Ukraine submits to the Verkhovna Rada of Ukraine a draft Law, which should grant to the Cabinet of Ministers of Ukraine the right, if necessary, to terminate payments to the holders of international debt obligations.

Ukraine faces serious economic challenges and an issue of payment of the international debt is an issue of justice.

The Ukrainian people are making extraordinary efforts to achieve the European future

 – and pay an extremely high price for it. Excessive debt burden of Ukraine "was entailed" by the previous regime of Viktor Yanukovych. Under his rule, the debt of Ukraine had increased by 40 billion dollars. The society never received the aforesaid funds. These were completely wasted and lost for the country.

At this, due payments on foreign currency debt obligations alone throughout the next 4 years amount about 30 billion U.S. dollars. This includes both service and the repayment of debt. And issues of justice in relation to the Ukrainian population is to reduce such extraordinary debt burden. Given that today the state budget for 2015 contains equal sum for servicing the debt with that of total expenditure on defence and law enforcement – over 9 billion hryvnias each. It's approximately 5% of GDP each. The Government has the right to direct the funds paid by taxpayers in Ukraine for the needs of its citizens instead of refunding loans having borrowed by the kleptocratic Yanukovych’s regime.

Our bilateral and multilateral partners meet our demands and engage in support of Ukraine’s people. The international community, including the U.S., the European Union and international financial institutions, stand with Ukraine in this difficult time. We have agreed with our international partners regarding:

• USD 17.5 billion to be granted to Ukraine by the IMF (in the case our country implements real reforms for our society);
• USD $ 7.2 billion expected by us in the shape of funding from our bilateral partners and international financial organizations.

But it is important that the owners of our debt obligations could also contribute to these efforts. In 2015 alone, having received assistance worth USD 3.1 billion, we have paid back USD 2.4 billion.

Therefore, USD 15.3 billion is the sum to reduce the burden on the balance of payments over the next 4 years, we expect on the outcomes of the negotiations with our international creditors through debt restructuring. Without the vigorous participation of commercial creditors, Ukraine won’t be able to stabilize the situation and resume an economic growth in 2016.

To protect the interests of Ukrainian people, the Government of Ukraine submits to the Verkhovna Rada today the draft laws, those enabling the Government to suspend payments on certain external public debts and guaranteed by the government debts, as specified in the Annex to the relevant Regulation of the Cabinet of Ministers. And in case of an attack from unscrupulous creditors to Ukraine, the moratorium will protect the assets of the state and of the public sector.

Any moratorium declared under the new law in the future will not affect our bilateral and multilateral debt obligations, neither it will affect our domestic obligations. The effect of the law is aimed at those external sovereign direct and guaranteed obligations specified in the perimeter (except for the two state-owned banks and Ukrzaliznytsia).

It should be noted that granting such a right to the Government of Ukraine will affect neither the stability of the banking system of the country nor the exchange rate of the Ukrainian hryvnia. But by adopting this law we appeal to our foreign lenders with a request to support Ukraine and share the heavy burden with us.