For now, the public quarreling between Ukraine and its creditors is over.
Finance Minister Natalie Jaresko will join negotiations with bondholders next week after the government said both sides agreed to take the talks private, ending two months of deadlock over the $19 billion debt restructuring. The agreement will “allow principal-to-principal negotiations on the substance of a possible solution to start next week,” Ukraine’s Finance Ministry said in an e-mailed statement Wednesday. The nation’s bonds rallied the most in more than a week.
The breakthrough reduces the likelihood that Ukraine will impose a moratorium on interest payments before its next one comes due July 24. The government in Kiev has threatened to stop servicing its Eurobonds if its proposal, including writedowns to principal, was not accepted, while a creditor group led by Franklin Templeton insists the nation’s restructuring goals can be met by pushing back due dates and cutting interest payments.
“The fact that the confidentiality agreement was made and the finance minister will participate in negotiations is a sign that shows that both sides are really serious,” Ian Hague, a founding partner at New York-based Firebird Management LLC, said by phone Wednesday. “It signals that the government and the creditors are closer to resolving the dispute.”
The accord comes after weeks of statements and counter statements in which each side blamed the other for the lack of progress. A spokesman for the creditor group declined to comment when contacted by phone.
The first Eurobond to mature is a $500 million, 6.75 percent note due Sept. 23, which is trading at 52.64 cents on the dollar, up 1.2 cents by 10:55 a.m. in Kiev. The sovereign’s $2.6 billion of 9.25 percent bonds maturing in July 2017 climbed for the first time in five days, gaining 1.7 cents to 49.26 cents on the dollar.
“The market is betting that the probability of moratorium is much lower,” Sergey Fursa, a Kiev-based bond trader at Dragon Capital, said by e-mail.
Ukraine has said the deadlock in the talks is due to creditors’ refusal to sign a confidentiality agreement that would clear the way for non-public information to be discussed. Bondholders said they have been prepared for weeks for restrictions on negotiations, but that Jaresko’s legal team was blocking the accord.
“Creditors will probably have to accept the haircut, and an agreement will be reached after both sides agree on the percentage of the haircut,” Firebird’s Hague said.
Other analysts, including Nicolaie Alexandru at JPMorgan Chase & Co. have questioned the need for cuts to principal. The creditor group has said a writedown would delay Ukraine’s return to international debt markets and threaten its ability to meet the IMF’s restructuring targets, which assume a resumption of borrowing by late 2017.
The confidentiality arrangement follows meetings in Washington D.C. on Tuesday between Ukrainian Debt Envoy Vitaliy Lisovenko, members of the creditor committee and representatives of the IMF. Jaresko didn’t attend, noting previously that they were technical meetings to discuss economic forecasts and not debt negotiations.
The IMF revised its forecast for the country’s 2015 economic contraction to 9 percent from 5.5 percent in May, but is yet to make public its updated estimates for debt-to-gross domestic product, one of the baseline assumptions on which its targets are based.
Ukraine is changing terms on its debt after a conflict with pro-Russian separatists in its easternmost regions sent its currency into a tailspin and drained reserves. The nation’s economy was dealt another blow on Tuesday when Russia took away most of a price discount for natural gas, prompting Ukraine to halt purchases.
The Washington talks are meant to ensure all sides understand “the reality of Ukraine’s situation,” Lisovenko told reporters in Frankfurt on Friday. “The structure of the economy is physically destroyed. We cannot rebound quickly.”
For more, read this QuickTake: Ukraine's Other War