This suspension – from governments and private lenders – is worth 15% annually, the weekly notes. Ukrainian GDP, and if payments are required, they will be the second largest state expenditure after defense.
“The Economist” writes that the International Monetary Fund wants Ukrainian Finance Minister Serhiy Marchenko to negotiate the cancellation of part of the debt, but it is impossible to conclude an agreement in such a short time. In June, he proposed to creditors an arrangement that would reduce the present value of the loans by 60 percent, but they responded that they believed it would be 22 percent. Considered very reasonable.
“Ukraine desperately needs fiscal space”
The weekly assesses that if Ukraine fails to meet its obligations, it will demonstrate private investors’ disturbing lack of confidence in Western commitment and could spell disaster for the country’s reconstruction in the long term.
“Ukraine desperately needs fiscal space. By the end of this year, its debt-to-GDP ratio will be close to 94% — a huge deal for an economy of such a turbulent fiscal history and size. The sums offered by allies are impressive, but they are artillery, tanks and Coming in the form of earmarked funds, only $8 billion of the latest US package will go directly to the Ukrainian government, and that too in the form of loans, but only USD 38 billion over three years,” writes “The Economist”.
He adds that while Ukraine’s proposed amnesty — $12 billion in 2024-2027 — is modest, there are no free funds it could provide if it is not granted. According to the IMF, under a tough restructuring deal proposed by Ukraine and rejected by bondholders, the country would barely be able to make ends meet.
“The Economist” explains that if no agreement is reached, Ukraine has two options. One is to negotiate an extension of the debt service freeze, as it has already done with non-private lenders that waive payments until 2027. Second bankruptcy. “This may sound harsh, but in reality the difference between these scenarios is small. Either way, Ukrainian payments will not resume,” he writes.
As he notes, the reluctance of private sector investors does not only reflect Ukraine’s financial prospects. In a normal restructuring, lenders focus on the country’s economic prospects. Lending money to a country at war involves a second risk: whether it will win.
“If Ukraine succeeds, bondholders are also skeptical about Ukraine’s long-term recovery plans. Although allies and the IMF argue that restructuring will allow Ukraine to re-enter financial markets once its partners write off loans, investors are not convinced. They believe such a day will never materialize, Ukraine’s partners said. and the first of many attempts to shift the financial burden of reconstruction costs from the government to the private sector,” the weekly wrote.
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