Lack of state insolvency regime undermines Ukraine debt deal
By Bodo Ellmers, Guest Blogger
Bodo Ellmers is Policy and Advocacy Manager at Eurodad, the European Network on Debt and Development.
Ukraine has reached a debt restructuring agreement with a creditor committee representing 50% of outstanding government bonds. Substantial debt reduction is essential to bring Ukraine’s debt down to sustainable levels. But the agreed deal falls short of what is needed. And the participation of the other 50% of bondholders is not secured, and cannot be secured in absence of a multilateral debt restructuring framework that can make binding and enforceable decisions. The Western powers’ reluctance to help build such a framework might have fed their ally to the vulture funds and their aggressive litigation strategies.
The Ukraine debt deal
According to information obtained by the Financial Times, Ukraine has reached a deal with a creditor committee led by the investment fund Franklin Templeton. The deal agrees a 20% haircut to Ukrainian government bonds worth US$18bn. It will also extend the repayment period by four years to ease Ukraine’s liquidity needs. As a sweetener, participating creditors receive a higher interest rate of 7.75% instead of 7.2%. In addition, reports the FT, “a GDP linked warrant will be provided from 2021 to 2040 that will pay out up to 40 per cent of the value of annual economic growth above 4 per cent.”
Too little, too late
The deal comes after Ukraine’s economy fell into a deep recession following the outbreak of the civil war and the annexation of the Crimean peninsula by neighboring Russia. Last year, Western powers used their influence in the IMF to unleash bailout loans of €9.6bn under the Extended Fund Facility. The programme came with brutal austerity and structural adjustment conditionality attached.
As in other IMF program countries, most prominently Greece, the economy collapsed further when implementation began and austerity policies started to impact. Earlier this year, the IMF revised growth projections downward, while lauding that “Ukraine at the moment remains current on all its debt, the coupon on the Russian bonds and all other coupons on Ukraine debt have been paid.”
The debt restructuring that is now being conducted was one of the conditions for official lending from the IMF, as the IMF faced increasing pressure to no longer violate its lending framework’s policy to refrain from lending into unsustainable debt situations, even if this is in the political interest of its major shareholders.
However, the 20% haircut negotiated with bondholders now falls short of the depth calculated by the IMF, which required savings to the of €15.3bn through a “debt operation” as part of an overall financing package. No further debt relief is presently in sight from any other creditor. Independent analysts even saw a need for much more comprehensive debt relief.
New food for the vultures?
It is far from certain if the remaining bondholders will participate in the deal negotiated by the creditor committee of Templeton and others. If the affected bonds were under Ukrainian domestic law, Ukraine could simply retrofit collective action clauses to them to secure full creditor participation, as Greece did with their domestic bonds back in 2010. Unfortunately, they are under English law. The holdout ratio – bondholders who refused to participate – under foreign law was 29% in the case of Greece. Ukraine could now face a similar situation. This jeopardises the whole deal.
The UK is one of just two European countries that has a ‘vulture funds law’ to avoid litigation by aggressive vulture funds. These funds have made a business model out of buying junk bonds of crisis countries at a few cents to the Euro, then suing for full payment. Unfortunately, the UK law is for debt of the Heavily Indebted Poor Countries only, a category to which the Ukraine does not belong. The UK’s legislators’ failure to respond in a timely manner to civil society warnings that the law must cover all nations could prove fatal in this case.
Western UN boycott could be fatal for Ukraine
The debt restructuring operation could have been conducted faster, fairer and in a far better way if the international financial architecture included an insolvency regime for sovereign debtors. In August last year, the group of developing countries at the United Nations mandated the UN General Assembly to create such a multilateral debt restructuring framework to avoid this situation. But the UN Committee that had been set up to do the job has been boycotted by the USA, the EU and the other G7 countries. Ironically, their ally Ukraine could now become the first victim of the Western powers’ regime-building boycott.
The upcoming UN General Assembly vote on the UN’s “Basic Principles of Sovereign Debt Restructuring Processes” in early September is a chance to finally back the needed reforms of the international financial architecture.
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