Ukraine calls for debt freeze as war ravages economy

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Police officers look at a bus stop, a mosque and buildings damaged by a Russian military strike, as the Russian invasion of Ukraine continues, in Kharkiv, Ukraine July 20, 2022. REUTERS/Nacho Doce

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Kyiv/LONDON, July 20 (Reuters) – Ukraine has asked its international creditors, including Western powers and the world’s biggest investment firms, to freeze debt repayments for two years so it can focus its dwindling financial resources on the fight against Russia.

Faced with an estimated 35% to 45% slump in GDP this year following the invasion of Moscow in February, Ukraine’s finance ministry said on Wednesday it hoped to finalize the carryover of its roughly $20 billion debt. here on August 9th.

The delay, which was quickly supported by major Western governments and heavy funds that lent to Kyiv, would come just in time to defer around $1.2 billion in debt payments due in early September.

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The government’s proposal, posted on its website, said all of its bond interest payments would be deferred under the plan, although to avoid what would be considered a final default, it also offered lenders interest payments. additional interest once the freeze is over.

“The disruption of fiscal cash flows and increased demands on government resources caused by the war have created unprecedented liquidity pressures and debt servicing difficulties,” the finance ministry said.

It came amid signs that Moscow is now stepping up its assault, with Russian Foreign Minister Sergei Lavrov saying on Wednesday that the Kremlin’s military targets in Ukraine now extend beyond the eastern Donbass region. Read more

Ukraine estimated that the costs of the war combined with lower tax revenues left a budget deficit of $5 billion per month, or 2.5% of pre-war GDP. Economists calculate that this pushes the annual deficit to 25% of GDP, compared to just 3.5% before the conflict.

On top of that, researchers from the Kyiv School of Economics estimate that it will already take more than $100 billion to rebuild Ukraine’s bombed-out infrastructure, while the head of the EU’s powerful financial arm, the European Investment Bank, warned that it could reach trillions. Read more

It is estimated that the debt freeze could save Ukraine about $5 billion over the deferral period.

“We, as official bilateral creditors of Ukraine, intend to provide a coordinated suspension of debt service,” said a group of governments including the United States, Canada, France, Germany, Japan and Britain soon after Ukraine made its proposal.

“We also strongly encourage all other official bilateral creditors to reach an agreement quickly,” the group added.

SUPPORT

Ukraine’s Finance Minister Sergii Marchenko said in a statement that the plan had also received “explicit indications of support” from some of the world’s largest investment funds, including BlackRock, Fidelity, Amia Capital and Gemsstock.

Wednesday’s decision marked a reversal of sorts for Kyiv, which has repeatedly said in recent months that it plans to maintain debt payments despite the war.

Speculation that a request for a debt freeze could be imminent, however, was stoked last week after national energy company Naftogaz also requested one. Read more

“A proper restructuring has yet to take place,” said Viktor Szabo, portfolio manager at abrdn, which owns Ukrainian government bonds. “But that cannot be done until the situation on the ground normalizes, that is to say a lasting ceasefire at least.” Read more

Ukraine has a multitude of bonds that total more than $20 billion in borrowings. The government also plans to postpone the payment of a growth-linked “warrant” offered after its last restructuring in 2015, which aimed to generously reward investors if the economy picks up its pace.

Tymofiy Mylovanov, an adviser to the Ukrainian presidential office, had urged Western countries to increase their financial support in recent weeks.

Global institutions such as the International Monetary Fund, the World Bank and Western governments have pledged $38 billion since the invasion, although nearly 80% of that support has been in loans rather than aid.

Through a spokesperson, the IMF said that “in general, voluntary preemption agreements would be a net positive for the outlook.”

Last week, the Fund said grant financing from the international community was a priority for Ukraine in the immediate and short term, as it would allow the government to remain operational without incurring new debt. Read more

Wednesday’s decision had little impact on Ukrainian bonds, most of which have already fallen more than 80% since Russia began bolstering its troops on Ukraine’s borders late last year.

“There is some support in the market for accepting this,” said Petar Atanasov, co-head of sovereign research at distressed debt fund Gramercy.

“Unfortunately, there is no sign of peace or a ceasefire on the horizon.”

($1 = 29.5000 hryvnias)

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Additional reporting Karin Strohecker in London and Leigh Thomas in Paris; Editing by Timothy Heritage, Elaine Hardcastle, Toby Chopra and Jonathan Oatis

Our standards: The Thomson Reuters Trust Principles.

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