Ukraine has told investors it plans to complete an unprecedented wartime debt restructuring process by August 1, 2024, to maintain access to international markets and meet International Monetary Fund requirements. About this with reference to two sources who participated in the telephone conversation of creditors with the Ministry of Finance, Reuters reported.
These statements are seen as part of our country’s new efforts to engage with investors after formal talks last month ended inconclusively.
It is also reported that Ukraine intends to include GDP warrants in its plans to restructure about 20 billion dollars of international bonds. This financial instrument was created as a “sweetener” for creditors during the restructuring of Ukraine’s debt in 2015 after the annexation of Crimea by Russia.
What are the benefits of GDP warrants?
They entitle investors to receive additional payments, depending on the GDP growth of the issuing country. Payments under GDP warrants are made only if the country’s economic growth exceeds a certain threshold. The fixed terms of GDP warrants mean that they usually have a fixed term and conditions under which payments are made. GDP warrants are often used in public debt restructuring to reduce the country’s immediate debt burden. For example, Ukraine issued GDP warrants in 2015 during the restructuring of its debt. Investors receive payments under these warrants only if Ukraine’s GDP grows faster than a certain indicator.
Thus, GDP warrants allow investors to benefit from a country’s economic growth, while the country gets some reprieve from debt payments.
Why is this important now?
The statements released last week showed that there is a fairly large gap between the 20 percent reduction that bondholders are willing to give and the offer from Ukraine that would lead to a 60 percent reduction. This reflects a significant conflict of interests between creditors and the government of Ukraine in wartime conditions, which complicates the negotiation process.
Our country has a huge debt – 19.7 billion US dollars in international bonds and 2.6 billion US dollars in GDP warrants. The successful restructuring of this debt is critical to Ukraine’s financial stability and its ability to withstand the economic challenges caused by the war.
How the demands of creditors changed
In August 2022, the owners of Eurobonds agreed to a two-year postponement of payments and their repayment terms. Investors in Ukraine’s foreign debt supported the decision to postpone payments, which will help the country more easily get through the heating season, which seemed too difficult for the country, with a dilapidated energy infrastructure. Most of Ukraine’s creditors have agreed to suspend payment obligations until 2027.
In October 2023 Reuters reported, that Ukraine is negotiating with foreign bondholders regarding debt restructuring plans worth $20 billion and the possibility of attracting new sources of financing.
But already in May 2024, the American edition The Wall Street Journal wrote, that foreign creditors of Ukraine seek to resume payments on the national debt as early as 2025.
Why are requirements volatile?
Since Ukraine is in a state of war, the risks associated with lending to the country are significantly increased. Lenders require additional guarantees or credit enhancements to reduce their risks. At one time, the demands of creditors were affected by the decrease in international support for Ukraine, in particular, the lack of assistance from the United States in the temporary financing bill. Creditors also assess the country’s ability to service its debt based on economic indicators – the current state of the Ukrainian economy, the impact of the war on the country’s economic activity and finances.
Credit conditions may also be influenced by the requirements of international organizations. If the IMF requires debt restructuring, but does not set exact deadlines, then this creates uncertainty for creditors. Changes in the global economic situation, the interests of other countries and investors can change the terms on which lenders are willing to provide financing.
Prospects for the future
Given the current economic and military circumstances, debt restructuring becomes not only a financial issue, but also a strategic step to ensure Ukraine’s long-term stability and development. Attracting international investors and maintaining their trust is key to economic recovery after the war. Success in debt restructuring can be a positive signal to other potential investors and contribute to further economic growth.
Ukraine continues to negotiate with international creditors, seeking compromises that will help reduce the debt burden and ensure stability in the near future. At the same time, the country is working on internal reforms that promote economic development and increase the efficiency of public finance management.
Successful implementation of these measures will have a positive impact on Ukraine’s economy, strengthen its position in the international arena and provide more favorable conditions for further growth and development.
