Goldman Sees Ukraine Default in July as Debt Standoff Holds

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Ukraine will miss a bond coupon payment in July, setting off a default on about $19 billion of debt, as a standoff with creditors shows no sign of abating, according to Goldman Sachs Group Inc.

The government is unlikely to resolve a disagreement with its creditors on its debt-repayment plan in the coming weeks and will probably issue a moratorium before a $120 million coupon payment comes due on July 24, analyst Andrew Matheny wrote in a research note on Wednesday. Ukraine is giving creditors a few weeks to accept a proposal that includes a 40 percent writedown to principal before it imposes a debt moratorium, a person familiar with the talks said on June 19.

“Ukraine will not make the July 24 coupon payment and, as a result, will enter into default at that point,” Matheny said of his base-case scenario in the report. “We do not expect the ad hoc committee to accept Ukraine’s latest restructuring proposal.”

Members of the committee, the government and the International Monetary Fund will meet in Washington next week as the crisis lender weighs whether to issue the next slice of a $17 billion loan to Ukraine. The IMF said earlier this month that it can keep supporting Ukraine even if it stops servicing debt held by private bondholders.

Templeton Plan

A creditor group led by Franklin Templeton that holds about $9 billion of Ukraine’s debt reiterated on Wednesday that its proposal, which uses maturity extensions and coupon reductions to save Ukraine about $16 billion over four years, is the best way forward. The group has opposed Ukraine’s insistence on a principal writedown.

The bond on which the coupon is due, a $2.6 billion note due July 2017, climbed 0.39 cent to 49.78 cents on the dollar by 1:30 p.m in Kiev. The securities have risen 12 cents from this year’s low on March 25.

Goldman’s Matheny reiterated his view that a principal writedown is necessary for Ukraine due to rising debt-to-GDP levels and slowing growth. The nation’s debt burden will rise toward 100 percent of GDP this year, from the IMF’s most recent forecast of 94 percent, he said. The IMF last month deepened its forecast for how much Ukraine’s economy will shrink in 2015 to 9 percent.

Ukraine’s offer to creditors to tie restructured bond payments to future economic performance would allow bondholders to profit from any upside if economic indicators outperform, Matheny said. That might allow the two sides to reconcile their differing views.

A proposal issued to Ukraine last month by the creditor group includes a similar GDP-linked instrument, a person familiar with negotiations said on June 12.

“We expect bonds to reflect economic fundamentals more closely, as the market begins to assess the pricing of these potential new instruments,” Matheny said in the report.

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