Ukraine to seek debt payment freeze as war ravages economy

[July 20, 2022]  By Natalia Zinets and Marc Jones

KYIV/LONDON (Reuters) - Ukraine will ask international bondholders to agree to a 2-year delay on its debt payments so it can focus its dwindling financial resources on repelling Russia, a government resolution published on Wednesday showed.

Facing an estimated 35-45% crash in GDP this year following Moscow's invasion in February, lawmakers have instructed the country's finance ministry to negotiate the deferral on its roughly $20 billion of debt by August 15.

The delay, which many creditors say is likely to be accepted, would come just in time to put off around $1.2 billion of debt payments due at the start of September.

The government's resolution posted on its website said, "all interest payment dates for the bonds" would be deferred under the plan.

In a bid to avoid what would be classed as a hard default, Kyiv plans to offer foreign lenders, which include many of the world's largest investment funds, additional interest payments once the freeze ends.

Ukraine has estimated a fiscal shortfall of $5 billion - or 2.5% of pre-war GDP - a month, which economists calculate pushes Ukraine's annual deficit to 25% of GDP compared with 3.5% before the conflict.
 

On top of that researchers from the Kyiv School of Economics estimate that it will already take over $100 billion to rebuild Ukraine's bombed infrastructure, while the head of the EU's powerful financing arm, the European Investment Bank, has warned it could run into trillions.

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

Wednesday's move marks something of a u-turn from Kyiv, which had repeatedly said in recent months that it planned to keep up debt payments despite the war.

Speculation that a debt freeze request could be imminent was fanned earlier this month after the country's state-run energy firm Naftogaz requested one.

"A proper restructuring still needs to happen, said Viktor Szabo, a portfolio manager at abrdn which holds Ukraine's government bonds. "But it cannot be done before the situation normalizes on the ground, i.e. a sustained cease-fire at least.”

Ukraine holds several outstanding issues of Eurobonds worth around $20 billion. The government also plans to postpone payment on a growth-linked 'warrant' offered after its last restructuring in 2015, which was designed to pay investors handsomely if the economy hit its stride.

Tymofiy Mylovanov, an adviser to the Ukrainian presidential office, has urged Western countries to increase their financial support for Ukraine.

($1 = 29.5000 hryvnias) GRAPHIC: Ukraine bonds brace for default, https://fingfx.thomsonreuters.com/
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(Additional reporting Karin Strohecker in London, Editing by Timothy Heritage and Elaine Hardcastle)

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