Azernews.Az

By Bloomberg

Ukraine’s threat to halt payments to bondholders may be just that if it intends to return to global debt markets any time soon.

As Finance Minister Natalie Jaresko’s team prepares to meet with investors in Washington next week, she will need to weigh the damage that imposing a debt moratorium could do to her credibility with future creditors against the value of such a move in restructuring negotiations with current bondholders. If the International Monetary Fund sticks to its assumption that Ukraine can start borrowing again as soon as 2017, she may have to start leaning toward the former.

A unilateral move to halt coupon payments would reduce “the likelihood of anybody buying a Ukrainian Eurobond in the future because, once you go into a haircut or a default situation, that stigma remains in place,” Simon Quijano-Evans, the head of emerging-market research at Commerzbank AG in London, said by phone Wednesday.

A moratorium is Ukraine’s biggest leverage against bondholders as it pushes them to accept a writedown to principal and end three months of deadlocked negotiations. With a conflict simmering in its easternmost regions and political pressure to get a deal that looks good to taxpayers, Jaresko is yet to show any signs of backing down. Creditors have a few weeks to accept a deal or face a freeze on payments, a person familiar with government thinking said last Friday.

July Default

Ukraine may opt to announce a moratorium before a $120 million coupon payment comes due on July 24, according to Goldman Sachs Group Inc.

“They are prepared to proceed with this course of action and are comfortable with the risks associated with doing so,” Andrew Matheny, a Moscow-based analyst at Goldman said in an e- mailed report June 24. The creditors’ stance suggest they’d rather accept a moratorium than the government’s proposal, he said.

A creditor group led by Franklin Templeton 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. Before even considering a default, imposing a so-called haircut would make a return to Eurobond markets impossible “not only in 2017 but well beyond,” they said in an open letter to IMF Managing Director Christine Lagarde.

The next Ukrainian Eurobond to mature, a $500 million note due on Sept. 23, rose 0.16 cent to 53.23 cents on the dollar by 12:28 p.m. in Kiev after falling the most in two weeks on Wednesday. The nation’s $2.6 billion July 2017 note gained 0.41 cent to 49.81 cents.

’Forgiving’ Markets

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.

A moratorium on debt payments by Ukraine 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 Friday in London.

The damage wrought by defaults is often exaggerated, according to Jakob Christensen, an analyst at Exotix Partners LLP in London.

“Markets are forgiving and risk-loving, especially if there is a post-crisis recovery and implementation of reforms,” he said by e-mail on Wednesday. “Market access tends to come sooner than believed.”

Company Access

The sovereign doesn’t only have itself to consider when deciding how rough to play with bondholders. A moratorium on the government-bond payments would exacerbate a financing squeeze on Ukraine’s companies, which have been locked out of international bond markets since January 2014.

Metinvest BV, a steelmaker controlled by Ukrainian billionaire Rinat Akhmetov, is restructuring more than $3 billion of debt after it was unable to access international capital this year to repay existing debts. The company doesn’t expect any material improvement in its overall liquidity before 2017, it said in a statement on April 8.

Members of the committee, the government and the IMF will meet on June 30 or July 1 in Washington, Jaresko said Wednesday.

“Execution of the debt operation now will contribute greatly to a faster re-entry into the international capital markets,” the country’s Finance Ministry said in an e-mailed response to questions. “For any country, re-entering capital markets is a function of the credibility of its fiscal and economic policies, as well as the long term sustainability of its debt.”

Bounce Back

Ukraine has bounced back before. After defaulting on $1.3 billion of bonds in 1998 and undergoing a restructuring in January 2000, it returned to markets in late 2002.

“While Ukraine has issued Eurobonds in challenging times, the very supportive global yield environment is no longer there,” Gunter Deuber, the Vienna-based head of central and eastern European research at Raiffeisen Bank International AG, said by phone on Wednesday. “If you default you will be shut out of the market for a longer period of time.”