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Ukraine Still Doesn't Have A Deal With Its Creditors

Kiev has been doing its utmost to please IMF, but does not have an understanding with its other creditors

This article originally appeared at Forbes

Ukraine’s high-touted “$40 billion bailout” from the IMF was always a lot less than meets the eye. Much of the money had already been promised to Ukraine in an earlier lending operation, and the amount of genuinely new funding was rather modest. Even more importantly, roughly $15 billion of the $40 billion in “assistance” provided by the IMF was actually predicated on the successful outcome of negotiations with Ukraine’s creditors. That is to say that more than a third of the total bailout wasn’t money that the IMF gave Ukraine, it was money that the IMF assumed Ukraine would save by defaulting on its debts.

Nor does the IMF itself really own any of Ukraine’s sovereign debt nor does it have any authority over the people who do. The people who actually own Ukraine’s debt are (quite understandably!) not terribly enthusiastic about a process that seeks to massively reduce its value. In other words, there were never any guarantee that the IMF’s target of $15 billion in savings was going to be met and there was always the chance that negotiations between Ukraine and its creditors were going to turn ugly.

Well, according to stories from both Reuters and The Financial Times things are turning ugly. Quite spectacularly ugly, in fact. Here’s how the FT reported on the situation:

Claiming that the creditor committee refused “despite numerous requests” to reveal its membership, the finance ministry stressed that it and debtholders needed by June “to agree on a sustainable debt level and debt service objectives meeting the targets” of an International Monetary Fund programme granted earlier this year.

“The ministry is committed to transparency, responsiveness and good faith negotiations and expects the creditors’ committee to do the same,” Kiev added.

In the usually restrained tone of government finance, that is basically the equivalent of a bar fight.

In its statements about the ongoing negotiations, Ukraine has taken a very strange rhetorical line that fixates on the achievement of the IMF’s objectives. But the international creditors, which appear to be informally led by the Franklin Templeton investment firm, are not a part of the IMF program. They did not buy Ukraine’s debt in order to achieve macroeconomic stability and they are not particularly concerned with the long-term health of Ukraine’s government finances. Their primary interest, their only interest really, is for Ukraine to pay its bills on time and in full.

Ukraine’s creditors are taking a very aggressive approach that entirely rejects the IMF’s demands for a “haircut” on the value of their holdings. Depending on how the negotiations actually shake out, Ukraine might get nowhere near the $15 billion in savings that the IMF deemed necessary to achieve financial stability. And if that happens Ukraine will have a substantial gap in funding, a gap that will need to be closed in one way or another (likely default).

It’s possible that the situation will be resolved in a mutually beneficial manner, a manner in which the creditors feel they are receiving adequate compensation for the delay or reduction in debt repayment and in which Ukraine’s government gains a sufficient financial cushion. It seems a lot more likely, though, that the current standoff will not be resolved cleanly and that rather than a calm and orderly process Ukraine will actually suffer a messy default.

Western governments have the financial resources at their disposal to swiftly and easily resolve this particular dispute, but despite their strong rhetorical commitment to Ukraine’s sovereignty they have been singularly unwilling to put up any money. As things stand, however, Ukraine’s short-term economic future hinges largely on the outcome of negotiations that, to all appearances, are spinning out of control.

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