The ad-hoc committee of holders of sovereign debt of Ukraine, and holders of debt issued by all state-owned enterprises of Ukraine says it disagrees that the International Monetary Fund's debt restructuring criteria provide the best framework to approach the current situation and claims that such an approach would delay Ukraine's eventual return to the global capital markets.
This is stated in an open letter from the committee in response to the statement from IMF Managing Director Christine Lagarde on June 12, 2015.
“The IMF restructuring criteria have been interpreted by Ukraine as requirements for a principal haircut, a reduction in coupon payments and an extension of maturity dates. Such an approach 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 letter reads.
The creditors noted that the IMF’s own assumptions point to continued market access as it expects $7 billion public market funding in 2017-2020. The imposition of a haircut, not to mention a debt default, would further reduce the already narrow universe of Ukrainian debt investors and make such financing impossible not only in 2017, but well beyond.
The creditors disagree that the IMF’s debt restructuring criteria provide the best framework and are “very willing to offer assistance.”
“The IMF Letter of Intent earlier this year outlined its requirements for a private sector debt solution. It listed three criteria under which success would be judged – a balance of payments criteria, requiring the private sector to generate $15.3 billion in financing during the restructuring program; a solvency criteria, obliging the government to achieve a public debt to GDP ratio of under 71% by 2020; and a financing objective, requiring the government to keep annual gross financing needs to an average of 10% of GDP annually between 2019 and 2025 and not to exceed 12% in any single year,” the creditors said.
However, they also said, “the massive deterioration in public debt ratios during the past 18 months has largely been driven by a dramatic devaluation of the exchange rate rather than excessive public spending.”
“Our committee recognizes the important role of the IMF in contributing to a collaborative solution. Similarly, the committee supports the objective of maintaining a strong international reserves position and accepts that these would be higher absent repayments to foreign currency creditors, including the IMF. We have therefore constructed a proposal that meets all three of the IMF’s stated criteria and maintains an appropriate level of reserves,” the creditors said.
“It is in this context that we designed a proposal that delivers almost $16 billion of additional liquidity to the country – a significant share of the burden. The private creditors would not get any principal repayment before 2019, while the IMF is getting repaid $4.4 billion between 2015 and 2018, and a total of $8.1 billion by 2020,” the letter reads.
According to the letter, the committee’s support for burden sharing does not extend to burden shifting and the unequal treatment of creditor classes. Ukraine’s repeated public insistence on a haircut specifically targets offshore holders of direct sovereign foreign currency obligations, leaving out all holders of quasi-sovereign and other forms of foreign currency sovereign indebtedness.
“Of the country’s $70 billion of public and publicly-guaranteed debt, only $19 billion has been identified for principal reduction,” the letter reads.
The committee confirmed that arrangements had been made for a meeting scheduled to be held the following week between the Committee, Ukraine and the IMF in Washington.
“We view it as vital that all parties sit down and negotiate a fair deal for all creditors in good faith, without preconditions, as soon as possible,” the letter reads.
