finance & markets

Default up the sleeve

07.11.2014 | By Olena Hubar

The total debt of the national and guaranteed by the government debt of Ukraine reached US $69.512bn, according to the Ministry of Finance and the IMF forecasts it growth by the end of the year to 102.2% of the GDP. According to the national budget 2014, the critical level of the national debt based on the results of the year should amount to UAH806.962bn. It is unlikely that Ukraine will stop borrowing any time soon


Financiers admit that it is becoming increasingly difficult for the state to settle its external debts. Based on the assessments of the IMF the GDP of Ukraine will decline 6.5% this year. The forecast of the World Bank is even more pessimistic at around 8%. These figures fully explain the essence of the problem of servicing the sovereign debt. Due to the loss of territories, military actions and crisis that followed the country is earning less. Naturally it has become more difficult to pay off the accumulated debts, says advisor to the CEO of Eurobank Vasyl Nevmerzhytskiy.

Disruption of the cooperation with the IMF is the key risk for Ukraines solvency. At the moment the needs of Kyiv for refinancing the external debt are covered by the IMF. The standby arrangement guarantees the capacity of the country to pay for its debts and reduce the average cost of the currency borrowings. Based on the agreements Ukraine should receive loans in the amount of US $11.9 bn from the IMF in the next 18 months. This ensures the payments on all currency debts of the Ukrainian government over the specified period with a slight reserve. Besides IMF, there are also other donor financing sources, says Chief of Analytical Department at AlfaBank Oleksiy Blinov. The market of commercial (nondonor) borrowings remains closed for Ukraine and will remain closed for at least another six months. Therefore any delay in the IMF financing will be the reason for renewal of the talks about the high risk of the countrys insolvency.


Market players believe there are several ways out of this situation. The country could announce default. That decision, however, would be too painful for the economy and would throw the country into a deep crisis for years, explains Nevmerzhytskiy. The decisions on attracting new loans and extending the old debts are optimal. This allows the economy to develop normally, increase GDP and provides a possibility to service the external debt in the future. There is only one potential risk in this. If the economy does not grow and the budget remains with a deficit, the country will be forced to announce default sooner or later. Creditors will not finance a state with negative macroeconomic forecasts in the long term.

The economists are convinced that so far there are no reasons for concern. If you analyze the payment calendar of Ukraine on its national currency debt, the only large payments in 20142016 is repayment of Eurobonds in the amount of US $3 bn, purchased by Russia. This is scheduled for December 2015, but it contains a covenant (obligation) on early repayment in case the country achieves the level of 60% of the indicator national debt against GDP, says Blinov. Clearly Ukraine already exceeded this figure, but it is not as easy to prove it as it seems. Even if Russia manages to put option earlier than planned, Ukraine will be able to repay it using the funds of the IMF and other donors. For all other debts, the load is not big.

Nonetheless, attraction of new funds abroad will be beneficial in the future. Obtaining financial assistance indirectly influences the possibility of reducing the cost of crediting of the economy through increase of the trust towards the banking system with further cheapening of the borrowings on the domestic and external markets, notes Director for Marketing Offers at Fidobank Volodymyr Budanov.

This is particularly relevant now, when loan interest rates for business reach 20% and for individuals have long surpassed this threshold.


The structure of obligations of Ukraine is quite diverse. Kyiv owes most to the external investors, who purchased securities for the total amount of US $20.7 bn. International financial organizations lent US $12.7 bn. International Monetary Fund, the largest creditor of the country, already injected US $8.5 bn (this debt is classified as a loan from the international financial organization and also other debts). International Bank for Reconstruction and Development is second largest creditor US $4bn. In addition to that, Ukraine owes US $790 mn to the European Community, US $678 mn to the European Bank for Reconstruction and Development, US $511 mn to the European Investment Bank and US$308 mn to the International Bank for Reconstruction and Development. In addition to that Ukraine owes US $243 mn to the Export Development Agency of Canada.

From the governments of other countries Ukraine received less only US $811 mn. Russia is the largest creditor with Ukraines debt at US $605 mn. Japan lent another US $184 mn, U.S. and Germany US$11 mn and US $9 mn respectively. Kyiv also has a debt to the foreign banks in the amount of US $3.5 bn. The largest creditors in this segment are: Export-Import Bank of China US $1.5 bn and Russian Gazprombank US $500 mn.

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