Investors downbeat on prospect of Ukraine debt deal by June

Investors in Ukraine say the country is unlikely to meet its June deadline to restructure $23bn of debt, putting the war-torn and recession-battered country at risk of default.

With positions hardening as crunch time approaches, markets are gearing up for protracted, summer-long talks.

But Natalie Jaresko, finance minister, said in Kiev on Thursday that the government remained committed to completing negotiations with eurobond holders and reaching a deal on time.

Speaking at a business event in Kiev, she warned the country's financial position could become untenable if talks stretched into the summer. "I don't see a meltdown per se . . . but the question [becomes] whether we can continue to service our debt," she said.

Bankers eyeing Ukraine's ravaged sovereign bonds say this scenario looks increasingly likely in spite of the recent success of debt restructuring talks. Last month, bondholders agreed to forgo repayment of a state-owned bank bond for three months, in a deal the government hoped would set a precedent.

Ukreximbank's April bond was the first due for repayment of 29 bonds and loans the country hopes to renegotiate with the aim of freeing up $15bn in foreign debt servicing over four years. The bank is one of several quasi-sovereign borrowers included in the largely sovereign bond restructuring plan.

However investors say Ukreximbank's negotiations were successful because the bank did not impose a "haircut" on their money, something Kiev has insisted is necessary in the wider debt restructuring.

A committee of some of the country's largest bondholders have proposed an alternative deal to avoid this but say they have so far had no response from the government.

The deadlock means a resolution in the next few weeks is unlikely, say JPMorgan analysts.

"Discussions with Ukraine sovereign bondholders have so far not made clear progress," wrote Jonny Goulden, emerging market strategist at JPMorgan. " We think the May/June timing for a completed Ukraine sovereign restructuring deal looks less likely, with an agreement more likely to be reached in [the third quarter].

"Our base case still does not see a haircut of principal on sovereign bonds in the current negotiations, but it is a close call as investors could agree on a small haircut of principal to make small concessions to Ukraine and the IMF."

Ukraine's planned debt restructuring is part of an internationally brokered $40bn, four-year rescue package that involves $17.5bn from the International Monetary Fund and $7.5bn in bilateral assistance.

In March, the IMF doled out the initial $5bn from the programme and is expected to decide on a second tranche in June.

In comments made during a round table hosted by the US-Ukraine Business Council, a business advocacy group, Ms Jaresko declined to discuss in detail what would happen if the country was unable to reach a deal with creditors before then. "Right now we are not going to forecast other scenarios," she said.

Admitting Kiev was on the verge of a financial "meltdown" at the start of the year, she said the country's finances had since stabilised, with central bank reserves up to nearly $10bn.

Addressing the question of a $3bn bond held by Russia, which has not participated in restructuring talks, Ms Jaresko said Moscow could "not block" wider plans.

She also warned of the need to eventually boost pensions and salaries for cash-strapped citizens as the country struggled with economic contraction and 40 per cent annual inflation. "You won't have this government around for long" if such issues are not addressed, she said, pointing to the risk of social unrest.

"The wiggle room in the budget comes from the debt restructuring. Until that's there, we are not stable," she added.

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