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By Bloomberg

Ukraine may not be able to achieve the International Monetary Fund debt-restructuring goals if it imposes a writedown on bondholders, according to a Franklin Templeton-led creditor committee.

Forcing a principal reduction on bondholders would “delay Ukraine’s eventual return to the global capital markets, raise the cost of capital-markets funding if and when it does return, and increase the country’s medium-term dependence on official financing,” the four-member group wrote in an open letter to IMF Managing Director Christine Lagarde, received by e-mail Wednesday. IMF assumptions of a return to Eurobond markets by 2017 is not possible in that scenario, it said.

The creditors, who together own about $9 billion of Ukraine’s foreign-currency debt, sent a proposal to the Finance Ministry last month that, they say, meets the IMF’s three targets through maturity extensions and coupon reductions alone. Negotiations have been deadlocked since Ukraine rejected the plan, returning with a counter-proposal just last Friday.

“It’s both a strategic move from the creditors, but also an issue which could be crucial in the future,” Dmitry Polevoy, the chief economist at ING Groep NV in Moscow, said by e-mail. “There are downside risks to the funding projections, and the ability to tap external markets should be taken into account.”

Lagarde appeared on June 12 to back the Finance Ministry’s objection to the creditor offer when she said that servicing debt out of international reserves would be “inconsistent” with the goals of the restructuring. The creditor committee’s proposal leaves the nation with “an appropriate level of reserves,” while acknowledging that they would be higher “absent repayments to foreign-currency creditors, including the IMF,” it said in the statement.

IMF Repayments

Private creditors wouldn’t receive any principal payments until 2019 under its plan, while the IMF would receive $4.4 billion between 2015 and 2018, and $8.1 billion by 2020, the committee said.

Ukraine’s next maturity, a $500 million Eurobond due on Sept. 23 fell 0.41 cent to 53.26 cents on the dollar by 2:40 p.m. in Kiev, retreating from the highest close in two weeks. The nation’s $2.6 billion July 2017 note was little changed at 49.67 cents.

Bondholders, the government and the IMF will meet on June 30 or July 1 in Washington, Ukraine’s Finance Minister Natalie Jaresko said today. A spokesman for the creditors declined to comment on e-mailed questions regarding the timing and agenda for the meeting.

‘Narrow Universe’

The eastern European country’s counter proposal includes a so-called haircut of 40 percent to face value and the government will impose a moratorium on debt payments if creditors don’t agree within a few weeks, a person familiar with the government’s position said on Friday.

Such a move would have long-term implications for the country’s access to international bond markets, Kristin Lindow, a senior vice president at Moody’s Investors Service, said in an interview on Friday.

“The IMF’s own assumptions point to continued market access, given it expects $7 billion public market funding in 2017-2020,” the creditor group said today. “Imposition of a haircut, not to mention a debt default, would further reduce an already narrow universe of Ukrainian debt investors and make such financing impossible, not only in 2017 but well beyond.”

’Implicit Threat’

It usually takes about three years for nations to regain market access after debt restructuring, and Ukraine could expect to do so by late 2017, the IMF said in March. The creditor group includes Franklin Templeton, BTG Pactual Europe LLP, TCW Investment Management Co. and T. Rowe Price Associates Inc.

“It’s a big implicit threat: we all know there are a lot of legal obstacles that could limit market access,” Gunter Deuber, the Vienna-based head of central and eastern European research at Raiffeisen Bank International AG, said by phone on Wednesday. “If we see a large court trial, I don’t see a big chance of people saying this is the bond or country I want to invest in when Ukraine returns to the market.”