Tag Archives: state debt

The scourge of rising inequality – A case of Pakistan

Abdul Khaliq

The issue of inequality, which was shunted aside amidst rapid growth over the last few decades, has resurfaced with a vengeance, particularly after the global financial crisis. The trend has been rising in most of the countries despite rapid economic growth.

Ukraine | Goldman Sees Ukraine Default in July as Debt Standoff Holds

by Elena Popina Natasha Doff
June 25, 2015
Ukraine will miss a bond coupon payment in July, setting off a default on about $19 billion of debt, as a standoff with creditors shows no sign of abating, according to Goldman Sachs Group Inc.
The government is unlikely to resolve a disagreement with its creditors on its debt-repayment plan in the coming weeks and will probably issue a moratorium before a $120 million coupon payment comes due on July 24, analyst Andrew Matheny wrote in a research note on Wednesday. Ukraine is giving creditors a few weeks to accept a proposal that includes a 40 percent writedown to principal before it imposes a debt moratorium, a person familiar with the talks said on June 19.
“Ukraine will not make the July 24 coupon payment and, as a result, will enter into default at that point,” Matheny said of his base-case scenario in the report. “We do not expect the ad hoc committee to accept Ukraine’s latest restructuring proposal.”
Members of the committee, the government and the International Monetary Fund will meet in Washington next week as the crisis lender weighs whether to issue the next slice of a $17 billion loan to Ukraine. The IMF said earlier this month that it can keep supporting Ukraine even if it stops servicing debt held by private bondholders.
Templeton Plan
A creditor group led by Franklin Templeton that holds about $9 billion of Ukraine’s debt reiterated on Wednesday that its proposal, which uses maturity extensions and coupon reductions to save Ukraine about $16 billion over four years, is the best way forward. The group has opposed Ukraine’s insistence on a principal writedown.
The bond on which the coupon is due, a $2.6 billion note due July 2017, climbed 0.39 cent to 49.78 cents on the dollar by 1:30 p.m in Kiev. The securities have risen 12 cents from this year’s low on March 25.
Goldman’s Matheny reiterated his view that a principal writedown is necessary for Ukraine due to rising debt-to-GDP levels and slowing growth. The nation’s debt burden will rise toward 100 percent of GDP this year, from the IMF’s most recent forecast of 94 percent, he said. The IMF last month deepened its forecast for how much Ukraine’s economy will shrink in 2015 to 9 percent.
Ukraine’s offer to creditors to tie restructured bond payments to future economic performance would allow bondholders to profit from any upside if economic indicators outperform, Matheny said. That might allow the two sides to reconcile their differing views.
A proposal issued to Ukraine last month by the creditor group includes a similar GDP-linked instrument, a person familiar with negotiations said on June 12.
“We expect bonds to reflect economic fundamentals more closely, as the market begins to assess the pricing of these potential new instruments,” Matheny said in the report.

IMF Double Standards: Ukraine and Greece

Despite the grievous state of the Ukrainian economy, the IMF said it will continue to lend money to Ukraine, so Kiev can complete economic restructuring.
“In the event that a negotiated settlement with private creditors is not reached and the country determines that it cannot service its debt, the Fund can lend to Ukraine consistent with its Lending-into-Arrears Policy,” IMF Managing Director Christine Lagarde said.
The IMF chief’s comments come as Finance Minister Natalia Yaresko and Ukrainian Prime Minister Arseny Yatseniuk wrapped up their promotional trip to US, which also included pleading with the IMF. Kiev hopes to persuade the international lender to release a $1.7 billion tranche of aid in July, as part of a $40-billion aid package that the IMF and Ukraine’s foreign allies have committed to.
Ukraine’s economic program (2015 – 18) seeks to implement macroeconomic and structural reforms. It’s designed to focus on fiscal consolidation and energy sector reforms as well as the banking system. Kiev hopes to generate $15.3 billion in public sector financing during the program period. Ukrainian authorities also aim to bring public debt to under 71 percent of the country’s GDP by 2020. Finally, the country seeks to gain economic stability by balancing the budget’s gross financing needs to no more than 12 percent of GDP annually in 2019 – 25.
Yet Kiev’s virtually bankrupt economy can’t make the debt payments, when a $500-million bond matures in September. Upon his return from Washington, Ukraine’s PM threatened to freeze debt repayments if no deal is agreed with private lenders. Kiev claims its military campaign in the east of the country is draining internationally borrowed funds.
“Today, Ukraine spends as much on foreign and domestic debt servicing as it does on defense,” Yatsenyuk told a government meeting. “The budget can no longer afford it – and not just the budget. The Ukrainian people can no longer live like this,” he said.
“We will not take money out of Ukrainians’ pockets to pay foreign debts,” he warned.
Comment: That may be his intention but that is not what the lenders want to hear.
Lagarde seems to agree that Kiev’s “international reserves cannot be used for sovereign debt service without the government incurring new debt, which would be inconsistent with the objectives of the debt operation.”
Yatsenyuk told the politicians that he expects the IMF board to meet in July, “so, all the preliminary conditions have to be agreed and approved by July.”
Earlier this week, while visiting the US, Finance Minister Yaresko said Ukraine can’t afford to wait until September to reach an agreement with its creditors. Unless the agreement is reached, Kiev might be forced to call a moratorium on debt payments. Last month, the Rada (parliament) passed a law allowing the government to do so.
“I don’t think we have that much time,” Yaresko said on Wednesday. “In that respect, I’d have to use other tools to reduce the pressure on the balance of payments, a moratorium.”
“If we’re not able to make progress, then the creditors will be provoking the use of that (moratorium),” Yaresko said. According to the minister, Kiev has already repaid some $2 billion.
The creditors’ committee led by US asset management firm Franklin Templeton has proposed drawing some $8 billion from Kiev’s central bank reserves as part of the restructuring plan, which Yaresko has called “unacceptable.”
As the negotiations continue, creditors issued a statement blaming Kiev for a lack of action.
“Minister Yaresko has been in possession of a detailed IMF-compliant solution from the bond committee for over a month,” creditors said on Thursday in an email statement. “We are deeply concerned about the stance the minister is taking, which is not in the interests of Ukraine. We are ready and willing to start talks at any time,” Reuters reports.