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By Bloomberg

Ukrainian Eurobonds rose to a five-month high as the nation said progress was made in talks with creditors following a two-month standoff over how to restructure $19 billion of international debt.

The country’s $2.6 billion of notes due in July 2017 jumped 0.94 cent to 54.19 cents on the dollar at 1:42 p.m. in Kiev, the highest level since Feb. 13. The two sides agreed to focus their attention on “narrowing the gaps” between their proposals and will hold more meetings next week, they said in a joint statement after meetings in Washington attended by Finance Minister Natalie Jaresko on Wednesday.

The more constructive tone follows comments from Ukraine debt envoy Vitaliy Lisovenko and Franklin Templeton bond chief Michael Hasenstab in the past week that suggest neither side is ready to give ground on the central issue of principal writedowns. An agreement needs to be reached before a $500 million Eurobond matures on Sept. 23, while investors are also watching for a $120 million interest payment on July 24.

“Both parties have begun to realize that time is running out,” Vitaliy Sivach, a Kiev-based bond trader at Investment Capital Ukraine, said by e-mail. “There’s a need to find a win- win solution before the holiday season, otherwise everyone should brace for a possible default in September.”

Ukraine is seeking debt relief after a 16-month conflict with pro-Russian separatists in its easternmost regions drained reserves, forcing the country to seek international aid. The International Monetary Fund announced Ukraine’s aid package and its three restructuring targets, including $15.3 billion of savings from debt-servicing costs, on Feb. 12.

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Hasenstab, who manages Templeton’s Ukraine debt, reiterated in a letter to The Washington Post on Sunday that a writedown isn’t necessary, while Lisovenko said in an interview with Ukraine’s Segodnya newspaper on Wednesday that the measure needs to be included.

Along with Franklin Templeton, Ukraine’s biggest bondholder, the government is negotiating with BTG Pactual Europe LLP, TCW Investment Management Co. and T. Rowe Price Associates Inc. The four members of the creditor committee together own about $9 billion of Ukraine’s international debt.

The Finance Ministry has asked bondholders to accept a 40 percent reduction to the face-value of the bonds, a person familiar with the matter said last month. Creditors have insisted that goals laid out in the IMF aid package can be met by lowering interest payments and extending maturity dates.

The Sept. 23 bond traded at a 0.69 cent premium to the 2017 notes, the smallest since October on a closing basis. The spread was 5.8 cents as recently as June 22 as investors bet they would get special treatment if a broader restructuring deal wasn’t reached by September.

“Nobody believes any more that the shorter-maturity bonds will get different treatment,” Dmitri Petrov, a London-based analyst at Nomura Holdings Inc., said by e-mail on Wednesday. “Default is the base case now for most if no agreement is reached.”