Ukraine dodges default with $3.6 billion debt deal

Western investors have thrown Ukraine a financial lifeline worth $3.6 billion by agreeing to write off some debt and delay bond repayments.

Prime Minister Arseniy Yatsenyuk announced the deal during a government meeting broadcast live on national television.

The restructuring applies to about $18 billion worth of bonds. It means Ukraine will avoid a costly default.

A haircut of 20% will be applied to debt covered by the agreement, yielding relief of about $3.6 billion, the finance ministry said in a statement.

That could rise to $3.8 billion if bonds issued by the city of Kiev, and other international loans, are restructured along the same lines.

Ukraine’s economy was brought to the brink of collapse by the turmoil triggered by Russia’s annexation of Crimea in early 2014, and a wider conflict with separatist rebels in the east of the country.

Its Western allies crafted a rescue in February: The International Monetary Fund agreed to lend Ukraine $17.5 billion over four years, while the European Union and United States also pledged substantial financial assistance.

The IMF has so far disbursed almost $7 billion. In return, the Ukraine government has been pressing ahead with reforms to its economy.

Another goal of the IMF rescue was to put Ukraine’s debt on a more sustainable footing, hence the need for a deal with its private creditors.

They were represented in the talks by investment firms Franklin Templeton, T Rowe Price, BTG Pactual and TCW.

Russia did not take part, and it’s unclear whether it will be prepared to accept a haircut.

“The Ukrainian government officially says Russia will never receive better conditions than other creditors,” Yatsenyuk said. “It should take our conditions because will receive no better.”

In exchange for providing immediate debt relief, creditors will receive a higher rate of interest once Ukraine resumes payments in 2019. They’ll also have a chance to recover some of their losses via a new bond that will pay out starting in 2021 if Ukraine manages to economic growth of more than 3%.

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