Ukraine agree on the postponement of debt payments. Special speech by Yurii Butsa

This is the text version of a special announcement of Yuriy Butsa, the Government Commissioner for Public Debt Management, made during the CES discussion and presentation on the “July Economic Report. Reconstruction here and now.” You can watch a recording of the event here, and read the report here.

Yuriy Butsa, Government Commissioner for Public Debt Management:

Yesterday, the Ministry of Finance and the government offered bondholders to postpone the repayment of their debt. This proposal is based on two key reasons.

The first reason is a desire to keep liquidity for priority goals. We have a lot of war-related expenses. The budget is also completely functional, and it covers humanitarian expenses, such as the payment of pensions, salaries, etc. But to do this, we need liquidity.

While we are very grateful for foreign aid, it is not enough to cover all our needs, and, considering that, we need to turn toward monetary financing.

The Ministry of Finance believes this is suboptimal. While we are still far from dangerous levels, we do not consider monetary financing to be the main source for the state budget. That is why we started considering postponing debt payments.

But the main factor was probably the consistent feedback we were receiving from all large bondholders. Ukraine has been very active on the debt market and has built one of the best system of connections with investors, not only on the European level, but also worldwide.

First, we have a history of a high-quality investor base, second, from the beginning of the war, we have been receiving feedback from investors who were saying : “We can’t give you any more money. But how can we help?” When we started discussing the ways they could help, investors would often mention the postponement of payments.

As a result, we came to the conclusion that continuing to pay on schedule would be a “credit negative event” from the point of view of investors. That’s because they expect that, if we continue paying, this worsens our reserves, and, in the long run, that would be worse for those same investors.

Over the last two weeks, we have been talking with a number of our largest investors. Some of them have agreed to make their support public. You can see some well-known names in our press release. The actual number of investors was higher, but the feedback was essentially the same.

Going off from this feedback, we came to investors with a proposal. The latter is made up of two parts. The first is a two-year postponement on the body of interest along the entire curve of bonds issued by Ukraine.

We also added interest capitalization. We have given them the opportunity to receive income during this period, and that our interest will not be paid on deferred interest. We believe that this will be received positively by rating agencies, since that is a key part of the methodology of rating such operations.

The second part is guarantees. You know this instrument well. It came up during the 2015 restructuring. I wasn’t at the Ministry of Finance then, so I may have a personal opinion on whether that tool was appropriate, but we have consistently reduced the risks from it. Essentially, as of today, the Ministry of Finance is the largest holder of guarantees.

But there is still a rather large volume of guarantees on the market, approximately 80% of the original release. And unfortunately, guarantees are structured in a way that they do not only work like equity instruments in times of constant growth, but they give big payouts at times of GDP volatility as well.

We saw the first effect of volatility during COVID, but, luckily, the GDP did not fall too low, and it picked back up consequently, not fast enough for the payouts to be very large. Right now, analysts forecast a 35% GDP drop this year as a consequence of the war.

If the war ends before the end of the year, the bounce back will still be large next year.

The holders of guarantees also generally agree that this instrument was not made to make profit from war, and from this statistical effect.

This is why are offering guarantee holders two additions to the current guarantee structure, the reduction of the payment cap in 2025 from 1% to 0.5% of GDP. Why do we do this? Because we believe that even 1% of GDP will be a lot in 2025, when the reconstruction investments will be high.

The second element we are pushing forward in the guarantee structure is the possibility to turn them back to their de facto nominal value. In a nutshell, the guarantees were issued at a nominal value of 20%, which was made in 2015 during restructuring, and we are offering the holders to return them to us for the same value between 2024 and 2027.

We also believe that this is fair to the investors, considering that the mean value of the guarantees over the past five years has been 80 cents on the dollar. So, this is within our rights, but we also consider this market-friendly.

I have been having calls with investors all day, and they will continue. We are answering every single question one-on-one. Yesterday, we had a group call with investors, and we are hoping that, on the 10th of next month, positive results will be announced. We are doing everything we can for that to happen.

Keep in mind, this is not default. This is not a restructuring in the usual sense of the term. This is a renegotiation of the terms before the payment deadline. So, this does not forecast any negative scenarios. We are just using the goodwill of the investors in order to give the state budget more liquidity to deal with the effects of the war on the country’s economy.

There was a positive statement from the Paris Club yesterday. What does this mean? Friendly support for your initiative? Will there be any concrete actions regarding official indebtedness in the year or two?

This is much more than just friendly support. This is the factual postponement of bilateral credits to suitable deadlines which were announced to be a rather lenient schedule of gradual payment. This is practically what we call “comparability of treatment.”

That’s what official creditors and commercial creditors do to give the country more liquidity for the restoration of the country. This has practical uses in maintenance and repayment of state debt.

Does this concern only bilateral creditors or international financial organisations as well?

This concerns only bilateral creditors, but, naturally, we also talking with international financial institutions as well. It’s a little early to discuss the technicalities, but we have touched upon the subject and are thinking of ways to go forward.

Is it possible to discuss debt obligations with the IMF?

I wouldn’t rush ahead. The IMF processes that we have seen in other countries rely on the fact that someone from said countries has to either support these payments or replace them. Another option that can be considered is an increase in IMF financing, which can cover payments.

Yes, we are in a situation where we have received from the IMF more than we have paid into it this year. How can we solve this? Funds paid into the IMF should be significantly higher than the funds given by the IMF. That is simplest.
If we were able to enter the market right now, the same scheme would work with commercial debt. You put in more than you repay. And then you conduct some kind of liability management and a rollover of the debt.

Unfortunately, we do not have access to IMF financing at this time. It’s very hard for us to make a macro forecast on the duration of a programme, so any kind of assumption significantly changes our macro forecast by three years.
We are currently trying to craft a sort of average scenario for the next year, in order to budget with the IMF, the National Bank, and the Ministry of Economy.

We have discussed what the next three years could look like, but, you know, when only 20% of the participants of a call have the same vision, that’s already good progress.

So, we are in talks with the IMF as well as other partners, to figure out how we can solve this. We need liquidity from the IMF. It’s too early to say what this will look like.

We have been focussed on the maximisation of funds from official creditors. We will surely discuss this in more detail, but I don’t want to give any pointers that we are moving in one or another direction.

Yes, we see the problem, but there is no decision that we can voice publicly.