Despite the ongoing war, Ukraine’s debt situation was a major topic of discussion among experts this summer. This was because the two-year debt moratorium granted by private pre-war investors expired in August. The investors granted the moratorium in 2022 on the assumption that the war would be over quickly and Ukraine would then be able to return to regular debt service payments – a judgment that proved wrong. In the summer, a debt restructuring agreement (which erlassjahr.de considers insufficient) was therefore negotiated with private pre-war investors.
However, once the war is over, the country will not only be in debt to private pre-war investors. According to IMF calculations, Ukraine’s debt-to-GDP ratio will hover to around 100 percent over the next few years, encompassing obligations to private pre-war creditors and public bilateral and, especially, multilateral creditors. At the same time, there is already an enormous need for financing for reconstruction. Therefore, there is a conflict between reconstruction and debt repayment. At the same time, current debt restructuring procedures are not suitable for dealing with the financial and political complexity of a nation recovering from armed conflict.
How can Ukraine recover socially and economically in the long term in such a context? We argue that this requires a special solution that cannot be achieved with existing the debt restructuring architecture.
Ukraine is not a unique case in terms of its debt situation. In recent history, extraordinary solutions have been found for debt crises following armed conflicts. These historical examples can serve as a source of inspiration for debt restructuring in a post-war context.
In our study “Dealing with Ukraine’s sovereign debt situation after the war – What historical precedents can tell us for the design of a special debt resolution,” we looked at four such historical country cases with special debt resolutions that are interesting for a new start after the war:
- The 50 percent debt relief for West Germany’s pre- and post-war debts in the 1953 London Debt Agreement
- The 1969 reduction of Indonesia’s external debt by half, occurring in the aftermath of the 1965 military coup, with debt equally divided between the Soviet Union and its allies and predominantly Western Paris Club creditors.
- The reduction of Poland’s external debt in 1991 after the end of the military regime
- The 80 percent cancellation of Iraq’s old debt after the fall of Saddam Hussein’s regime in 2004
Of course, none of these episodes is identical to the debt situation that post-war Ukraine may face and therefore cannot be used as a blueprint. Nevertheless, the study identifies elements, arguments, criteria, and procedural steps from which lessons can be drawn for Ukraine’s sustainable economic recovery.
These lessons include:
- 1953 London Debt Agreement:
Priority given to long-term cooperation rather than maximizing creditor claims: Key creditors placed greater emphasis on the long-term peaceful coexistence and economic integration of Germany than on narrow creditor interests. This attitude enabled a quick and effective solution that accelerated Germany’s reconstruction.
Elements that guaranteed a long-term sustainable solution: suspension of debt service if Germany did not achieve a trade surplus with the respective creditor, and independent arbitration in cases of conflict. Furthermore, Germany’s debt service ratio never exceeded 3.5% of annual export earnings. Such low figures could be used to calculate debt relief for Ukraine.
- Indonesia’s debt relief in 1969:
Impartial mediation: An independent mediator played a decisive role by developing a proposal that was acceptable to all creditors. This neutral mediation ensured a long-term sustainable outcome by defusing conflicts between creditor groups and minimizing unilateral profit interests.
Debtor protection: Indonesia benefited from a contingency clause that allowed payments to be adjusted according to economic developments – both positive and negative. Additionally, debt service was limited to just 5-6% of revenue to balance repayment capacity with long-term reconstruction needs.
- Poland’s debt restructuring in 1991:
Avoiding half-hearted solutions through political pressure: The disastrous experiences with insufficient Paris Club debt restructuring in Poland during the 1980s led to a clear understanding that far-reaching debt relief was inevitable. Political pressure from the U.S. Bush administration helped to push through these comprehensive debt relief measures despite resistance.
Equal treatment as the key: A key success factor was the strict principle of equal treatment of all creditors.
- Iraq’s debt relief in 2004:
Protection of resources and assets: The immunization of Iraq’s oil resources by UN Security Council Resolution 1483 protected the country from claims that would have led to unsustainable resource outflows during and after the restructuring process. Although a similar resolution for Ukraine is less realistic due to geopolitical hurdles, national laws or executive measures could have a comparable protective effect.
Temporary relief through moratorium and consistent equal treatment: A comprehensive debt moratorium gave the country the necessary leeway for negotiations and increased pressure on creditors to agree to a settlement. Furthermore, the strict equal treatment of claims against Iraq shows that a coherent, uniform approach can deliver a more sustainable and fairer outcome despite divergent creditor interests.
Whether Ukraine will recover economically depends on how innovatively its debt situation is handled.
While an extraordinary solution to Ukraine’s debt must be the priority, such an approach could also inspire broader reforms that help address power imbalances between debtors and creditors in the current global debt architecture. Compared to the status quo, this would increase the chances for other highly indebted countries – including, but not limited to, those in conflict situations – to achieve sustainable debt recovery.