Ukraine on brink of default

Vladimir Zelensky has signed a law allowing Kiev to suspend debt payments to Western creditors for two months.

Ukraine’s Vladimir Zelensky has signed a decree allowing for the suspension of the country’s external debt payments for two months starting August 1, and hopes to reach a restructuring agreement with creditors in order to avoid default.

Last month, Ukraine announced a preliminary deal with a committee of its main bondholders to restructure the country’s near-$20 billion worth of international debt. The proposal specified a 37% nominal haircut on the nation’s outstanding international bonds, saving Kiev $11.4 billion in payments over the next three years. Ukraine will issue new Eurobonds in return.

Kiev secured a preliminary deal to suspend debt repayments back in 2022 after the escalation of its conflict with Russia. The two-year payment moratorium on the payments expired on August 1.

Apart from amending the country’s Budget Code to allow Kiev to halt payments, the newly adopted legislation allows the authorities to include Ukravtodor’s 2021 Eurobonds, valued in aggregate at $700 million plus interest, in the state debt restructuring framework.

The move will be the country’s second rework of the kind in a decade. A similar solution which gave Kiev the right to suspend payments on sovereign debt was applied in the restructuring deal of 2015. Ukraine passed legislation on specifics of transactions with state debt, state-guaranteed debt and local debt in May of that year, reached agreements in principle with creditors the following August, and announced the deal’s conclusion several months later, in November.

International bondholders have yet to approve of the latest debt-restructuring agreement, with the technical issues behind it expected to take weeks to work out. However, a short-term default would have a less significant impact on Ukraine’s long-term borrowing prospects than a default with no deal in sight.

Last week, US-based credit rating agency Fitch warned of an imminent default in Ukraine, announcing that it had further cut Kiev’s credit rating from ‘CC’ to ‘C’ which denotes that a country has entered default or is in a default-like process.

Fitch also projects the state deficit to remain high, at 17.1% of Ukraine’s GDP this year, noting that defense spending amounted to 31.3% of the country’s annual economic output in 2023. The agency expects Ukraine’s debt to surge to 92.5% of GDP in 2024.