The international agency Fitch Ratings has lowered Ukraine’s long-term foreign currency default rating to C from CC (from probable to inevitable).
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The agency said the downgrade of Ukraine’s long-term rating reflects Fitch’s view that the agreement in principle reached on July 22 between the Ukrainian government and certain Eurobond holders on the terms of a restructuring, after parliament last week approved a law allowing the government to suspend payments on its external commercial debt, marks the beginning of a process resembling a default.
On July 22, Ukraine reached an agreement with the Eurobond Owners Committee on debt restructuring.
This is an important stage in the debt restructuring process, which will save $11.4 billion on debt servicing over the next three years and $22.75 million by 2033, Prime Minister Denys Shmyhal wrote, adding that Ukraine will free up resources for urgent needs: defense, social protection, and reconstruction.
Let us recall that in August 2022, Ukraine agreed on a two-year deferment of debt servicing on direct and state-guaranteed Eurobonds. Now it has been possible to conclude a new agreement.
History of the issue
Dozens of the world’s largest publications have written about Ukraine’s success in restructuring debt obligations worth more than $20 billion under an agreement with foreign holders of Ukrainian bonds, which is called unprecedented in terms of volume and conditions.
In fact, Ukraine has managed to cancel or defer 90% of the payments – which it would have had to pay over the next four years. Instead, depositors will receive bonus payments later, Reuters writes.
Politico notes that the agreement is preliminary: the owners of about a quarter of Ukrainian bonds have agreed to it.
However, firstly, these are the largest and most authoritative investors such as Black Rock, Amundi and Anima Capital. Secondly, the agreement was approved by the International Monetary Fund. Therefore, there is a high chance that it will be possible to reach an agreement of two thirds of investors in Ukrainian bonds – this is how much is needed for the deal to take place.
If that happens (and Ukrainian government and investment company officials have spoken to The New York Times about the agreement as if it were a done deal), the $11.4 billion that Kyiv owes over the next three years will remain in the Ukrainian budget. It will go toward covering the costs of repelling the Russian attack, as well as, in the long term, the country’s post-war reconstruction.
If it had not been possible to agree on a deferment, Kyiv would have had to pay off billions of dollars in debt by August 1, and if it had not done so, the default would have worsened relations with creditors in the future and would have affected Ukraine’s international reputation in general, the publication writes.
The further into the future, the higher the payments should become under the new agreements. And the bonuses that investors will receive for their patience are tied to the success of the Ukrainian economy, the Financial Times notes. For example, if Ukraine’s GDP exceeds GDP forecasts by three percent or more, the payments will increase by a third.
At the same time, the government hopes that after the war ends, owners of Ukrainian bonds will invest in the restoration of the country’s economy, in particular by writing off part of the debt.
The $11.4 billion that won’t have to be paid is a significant aid to Ukraine, but it’s not a panacea, the NYT notes. The expenditure side of this year’s budget alone is $80 billion, and half of that will go to the needs of the defense forces. However, debt restructuring opens up opportunities for additional financial support, in particular loans from international financial organizations like the International Monetary Fund or the European Bank for Reconstruction and Development.
Source: Racurs
I am David Wyatt, a professional writer and journalist for Buna Times. I specialize in the world section of news coverage, where I bring to light stories and issues that affect us globally. As a graduate of Journalism, I have always had the passion to spread knowledge through writing.