Rebuilding will be harder.

Photographer: Genya Savilov/AFP/Getty Images

Ukraine's Debt Debacle

Mark Whitehouse writes editorials on global economics and finance for Bloomberg View. He covered economics for the Wall Street Journal and served as deputy bureau chief in London. He was previously the founding managing editor of Vedomosti, a Russian-language business daily.
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Even as its conflict with Russian-backed secessionists festers, the Ukrainian government is facing a growing threat on the economic front: A sovereign debt burden that is rapidly becoming unbearable.

The insurgency in the east has undermined the Ukrainian government's finances in two ways beyond the direct costs of war. First, by crippling industrial regions that accounted for as much as 20 percent of the country's output, it has pushed the economy into a deep recession. Second, by triggering capital flight and an attendant plunge in the value of the Ukrainian hryvnia, it has made the government's largely dollar-denominated debts much larger in local-currency terms.

Here's a chart showing Ukraine's government bonds and loans outstanding as a percentage of gross domestic product, with the latest data point adjusted for the hryvnia's exchange rate as of Feb. 26:

As the chart shows, the Ukrainian government's debt stands at more than 100 percent of gross domestic product. That's up from about 40 percent in early 2014, when Russia initiated the annexation of Crimea, and well above the 70 percent level at which the International Monetary Fund typically considers an emerging-market country to be at elevated risk of insolvency. Even if the government eventually managed to stabilize its economy and its borrowing costs, it would likely have to run a budget surplus (excluding interest payments) of about 4 percent of GDP indefinitely -- an unprecedented feat for just about any country -- just to keep such a debt burden from growing.

To make matters worse, an outsized chunk of Ukraine's debt comes due over the next few years. Total interest and principal payments through 2017 add up to $27 billion, dwarfing the country's $5 billion in foreign reserves and even the $17.5 billion that the IMF is considering lending to the government. Here's a breakdown of the principal owed by year:

Ukraine is planning to ask for relief from creditors. Russia, to which Ukraine owes $3 billion due in December, could refuse, leaving the losses to fall primarily on private bondholders, among the largest of which is U.S. asset manager Franklin Templeton. The country's finance minister said recently that the government would be looking to get as much as $15 billion in concessions -- an amount that analysts at Goldman Sachs estimate could cut the value of Ukrainian bonds by as much as 50 percent. Judging from the speed with which the government's finances are deteriorating, that may be just the beginning.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Mark Whitehouse at mwhitehouse1@bloomberg.net

To contact the editor on this story:
Max Berley at mberley@bloomberg.net