(Düsseldorf, July 24, 2024) Last Monday, Ukraine reached an agreement with its private bondholders on pre-war claims, on which Ukraine has not had to service its debt since August 2022. This decision comes as a surprise, because Ukraine requested significantly higher haircuts shortly before than was now granted. erlassjahr.de criticizes that the small haircut puts the profit interests of creditors above lasting relief for Ukraine.
The offer that the Ukrainian government presented to its bondholders at the beginning of July, ahead of the expiration of the debt moratorium on August 1, provided for a 60 percent haircut. The International Monetary Fund had endorsed this measure as consistent with Ukraine’s debt sustainability. However, private investors, including BlackRock, PIMCO, Fidelity, and Alliance Bernstein, refused to agree to the requested relief. Default appeared increasingly imminent. On July 22, Ukraine surprisingly agreed with its investors on a haircut of just 37 percent.
Kristina Rehbein, political coordinator of the German jubilee network erlassjahr.de, stated: “The investors have forced Ukraine to back down. The final debt relief is far too small.” From the perspective of erlassjahr.de, the current situation would have required even more comprehensive debt relief than the 60 percent initially proposed by Ukraine.
Malina Stutz, political advisor at erlassjahr.de, adds: “Our calculations show that the haircut is in fact even lower than publicly announced. Investors have charged hefty interest of US$3.7 billion for the two-year debt moratorium since 2022. As a result the net debt relief shrinks, bringing the effective haircut down from the proclaimed 37 percent to just 25 percent.”
In addition, the agreement provides that investors will continue to benefit if Ukraine’s economy outperforms IMF forecasts until 2028. In that case, creditors would receive up to an additional $2.8 billion in repayment. Stutz: “This means that the actual debt reduction can be pushed down to just under 11 percent. At the same time, however, there is no agreement that Ukraine will have to repay less debt if the economy performs worse than projected by the IMF. This is a development that we are currently seeing in other debt restructurings as well.”
The agreement eases Ukraine’s immediate financial pressures. However, calculations by erlassjahr.de show that Ukraine will have to pay a total of over USD 1 billion in interest up to and including 2027. Repayments are scheduled to begin in 2029, at which point the payment burden will increase sharply. Stutz comments: “This deal therefore is not about supporting a war-torn country, but about protecting the profit interests of creditors.”
Rehbein believes that public actors have a responsibility: “Moral arguments cannot convince reluctant bondholders to accept high haircuts – this has never worked in any debt crisis. Nevertheless, the IMF and public actors such as the German government play an important role in debt restructuring negotiations with bondholders. They should support debtor countries such as Ukraine politically, financially, and legally in enforcing comprehensive debt relief with their bondholders.”
Rehbein: “The IMF and Western countries must not make themselves accomplices of the bondholders by classifying the deal as sufficient. Western countries have a common interest in ensuring that the Ukrainian state is not further destabilized by high debt servicing – and should act accordingly.” Hence, erlassjahr.de calls on the German government and its partners to take swift action and to enforce comprehensive debt relief. Rehbein: “It is urgently necessary for Germany to finally pass a law that ensures the participation of private creditors in comprehensive debt relief. This is already being discussed in the German government.”
Further information:
- de Blog: “Ukraine: Options for the end of the debt moratorium in 2024” (15 December 2023)
- Article: “Ukraine: Fight now – pay later: An analysis of the debt level and options for debt relief” in the Global Sovereign Debt Monitor 2023
- Focus Paper 11: “Alleviating Ukraine’s (legacy) debt burden during the war: What are the options?” (March 2024)
The German jubilee network “erlassjahr.de – Entwicklung braucht Entschuldung e. V.” (erlassjahr.de – Development Needs Debt Relief) is committed to ensuring that the living conditions of people in indebted countries are given greater importance than the repayment of sovereign debt. erlassjahr.de is supported by more than 500 organizations from churches, politics, and civil society nationwide and is part of a global network of national and regional debt relief initiatives.
E-Mail: k.rehbein@erlassjahr.de
Tel: 0211 / 46 93 217
www.erlassjahr.de