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Ukraine Seen Prevailing in Creditor Showdown Over Debt Write-Off

Ukraine will win out over foreign bondholders by sealing write-downs in restructuring talks, according to the majority of economists in a Bloomberg survey.

The government will achieve a 30 percent reduction in the amount it owes, on top of cuts in coupon payments and extensions to bond maturities, according to the average estimate of 13 of 15 analysts in the survey, conducted May 22-27. Two saw no debt write-off. Meanwhile, the nation’s recession will stretch into 2016, the first time the economist survey has predicted a contraction next year.

“A haircut isn’t a government whim -- it’s justified by a simple economic logic,” Alexander Valchyshen, head of research at Investment Capital Ukraine in Kiev, said by phone. “The current economic situation is worse than expected.”

Battered by a war in its easternmost regions that’s turned the hryvnia into the world’s third worst-performing currency, Ukraine is seeking to restructure $23 billion of debt to keep funds from an international bailout flowing. A creditor group led by Franklin Templeton Investments has so far rejected write- downs, saying Ukraine can meet saving targets without them. 

The creditors put forward a proposal to extend maturities as much as 10 years and reduce interest payments by about $500 million, according to a person with knowledge of the thinking of the committee. While the group’s adviser, Blackstone Group International Partners LLP, described the offer revealed May 29 as an “olive branch,” the Finance Ministry in Kiev said a writedown was necessary to achieve targets for debt sustainability.

Talks between the two sides' advisers will intensify this week in London, with the principals scheduled to have a call to assess progress on June 5, the Finance Ministry in Kiev said in a statement late May 29.

Bonds, Hryvnia

Government debt due 2017 has traded at less than 50 cents on the dollar since mid-February and fell 0.2 cents to 47.7 cents as of 11:17 a.m. in Kiev. The hryvnia weakened 0.3 percent to 21.11 per dollar, extending this year’s losses to 25.1 percent, the third-worst performance among global currencies tracked by Bloomberg.

Ukraine must restructure its debt before the International Monetary Fund decides on disbursement of the nation’s next loan tranche in June. There’s a 20 percent probability that deadline will be met and a 65 percent probability talks will be concluded by the September maturity of the government’s Eurobond, according to the median of 16 economists.

While parliament this month granted powers to impose a moratorium on debt payments, there’s only a 38 percent chance Ukraine will impose it, the economists said.

As the negotiations drag on, Ukraine’s economy is set to worsen. Gross domestic product will plunge 8.3 percent this year and decline a further 0.3 percent in 2016, a median projection showed. The IMF Sunday cut its forecast for this year's GDP contraction to 9 percent.

For related news and information:
Ukraine Moratorium Threat Dismissed as Bonds Recover From Shock
Ukraine Warns ‘All Options’ Available If Creditor Talks Stumble
Ukrainian Economic Output Plunges 17.6% as War Chokes Industry

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