EU Commission urges US, European investment giants to reach ‘swift’ debt restructuring deal with Kyiv

The European Commission has urged private creditors to “swiftly” reach an agreement with the Ukrainian government to avoid Kyiv defaulting on billions of dollars in debt at the start of next month.

The EU executive made its appeal ahead of the expiry on 1 August of a two-year moratorium on Ukrainian interest payments on private creditors’ loans, which had been agreed shortly after Russia’s full-scale invasion in February 2022. The deal is worth roughly 15% of Kyiv’s annual GDP, or $20 billion.

“It is key that Ukraine and international bondholders swiftly find an equitable agreement on the parameters of the restructuring, which is essential to the objective of restoring Ukraine’s debt sustainability,” a Commission spokesperson told Euractiv on Thursday (11 July).

“We have confidence that the involved parties are committed to finding a satisfactory and orderly restructuring agreement before the debt service suspension with international bondholders expires,” the spokesperson added.

The comments follow the failure of bondholders and Ukrainian officials to reach an agreement about restructuring $20 billion of Kyiv’s external debt despite lengthy negotiations last month.

Kyiv, whose deficit and debt levels have soared since the start of the Russian military offensive in February 2022, demanded a 60% haircut. Bondholders, who include several US and European investment giants such as BlackRock, PIMCO, Fidelity and Amundi, proposed a write-down of 22%.

Notably, a $15.6 billion loan agreed with the International Monetary Fund (IMF) in March last year partly hinges on successfully restructuring a significant proportion of Ukraine’s foreign debt.

Meanwhile, US and EU aid to Kyiv is unlikely to address the country’s imminent fiscal crunch.

A $60 billion aid package approved by US lawmakers in April is earmarked exclusively for military purposes, while a technically complex $50 billion loan agreed by G7 leaders last month is only expected to arrive months after the August deadline.

Moreover, Ukraine will face new headwinds ahead of March 2027, the expiry date of a debt service suspension agreed by the governments that lend to Ukraine on the markets—Canada, France, Germany, Japan, the United Kingdom, and the US.

“When the debt suspension expires, if there is no agreement on a new debt suspension, or a full debt restructuring, then Ukraine is likely to default,” Tim Jones, head of policy at Debt Justice, a UK-based non-profit organisation, told Euractiv.

Jones condemned private bondholders’ refusal to accept a more substantial debt reduction.

“[Ukraine] cannot, and should not, be paying private creditors in full while facing the invasion from Russia,” he said, adding that “the only reason private creditors are unwilling to accept a greater write down is that they are pushing for greater profit for themselves”.

Jones said that bondholders’ current stance is tantamount to demanding that public agencies and governments – and taxpayers – service their loans instead.

“By refusing to accept a write-down, bondholders are trying to get public money pledged to Ukraine by the IMF, EU, and others to be spent paying off private lenders, rather than rebuilding Ukraine,” Jones said.

Maksym Samoiliuk, an economist at the Centre for Economic Strategy (CES), a Kyiv-based think tank, echoed his remarks.

“Given that Ukraine uses all of its own budget revenues to finance defence, the main source of repayment of private debts could be budgetary assistance from foreign countries, i.e., their taxpayers’ money,” he told Euractiv.

“In this light, the interest of governments in the success of Ukraine’s negotiating position seems logical.”

Contacted by Euractiv, Greenbrook Advisory, which manages communications on behalf of corporate bondholders’ negotiating committee, declined to comment.

Private creditors open to further negotiations?

Overall, however, Samoiliuk believed that the “most likely and optimal” scenario is to reach a debt-restructuring deal.

“Our opinion is that the private creditors’ position is only their initial offer, and eventually, a write-down that is acceptable to both sides should be negotiated.” 

Samoiliuk also explained that a default by Kyiv would have little, if any, immediate impact on the EU – or even the Ukrainian – economy, given that the sums being negotiated represent less than a fifth of Ukraine’s total external debt.

He also noted that the consequences of a default would only become apparent once the war is over.

“In a calmer, more peaceful environment, avoiding a default is important to preserve the country’s access to external capital markets,” Samoiliuk explained, while “Ukraine lost this access weeks before the full-scale invasion began.”

“However, despite the absence of practical short-term consequences of a Ukrainian default, it should still be avoided to improve the conditions for Ukraine’s return to external lending when the security situation allows.”

Aggravating Ukraine’s budget crunch

Contacted by Euractiv, Ukraine’s Ministry of Finance pointed to the shorter-term impacts of a default, highlighting the remarks made in mid-June by Finance Minister Sergii Marchenko. Without restructuring, the minister said, “Ukraine will not be able to sufficiently finance [its] defence and embark on [its] bold recovery and reconstruction agenda”.

A joint report by the United Nations, World Bank, the Ukrainian government, and the European Commission published in February estimated the total cost of rebuilding Ukraine at $486 billion.

The figure is now likely to be substantially higher, as Russia has ramped up its attacks on Ukraine’s energy infrastructure since the report was published.

Overall, the possibility of a default comes amid a worsening budgetary situation in Kyiv, with the government increasingly forced to sell off state assets to finance the war effort.

Kyiv’s military expenditure surged from 3.2% of annual GDP in 2021 to 37% last year, while its total deficit soared from 4% to 19.7% over the same period.

The IMF projects that Ukraine’s debt-to-annual GDP ratio will rise to 94% this year—almost double before Russia’s invasion.

“The budget is in the red,” Oleksiy Sobolev, Ukraine’s deputy economy minister, said last month, warning that the country needs “to find other ways to get money to keep the macroeconomic situation stable ” while supporting its own military efforts.

[Edited by Anna Brunetti/Zoran Radosavljevic]

Read more with Euractiv