Update: Seems we were right to regard this as curious…
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The Russia problem aside, Ukraine’s other big task in its $15bn debt restructuring will simply be to convince private bondholders that it’s a deal worth taking.
One way to do that is for bondholders to realise they are dealing with a government burdened with the costs of war and as it happens, increasingly absorbed in an intense lustration campaign.
But some of them (quite possibly one that lives in San Mateo, CA) could have holdings large enough to block a bondholder vote. So, even if Natalie Jaresko, the Ukrainian finance minister, does like to quote Margaret Thatcher about there being no alternative… the new bond terms will need to justify taking a massive haircut compared to holding out for full payment.
Another way to do it? Note how ripe for abuse the old bond terms are.
When Lee Buchheit, Ignacio Tirado and Mitu Gulati were looking deep within the innards of Cypriot government bonds just over two years ago — shortly before the climax of the island’s debt crisis — they found something exciting. Read more
This week’s $40bn IMF programme announced for Ukraine will include some restructuring of its debt. Gabriel Sterne, head of global macro research at Oxford Economics, points out that it comes at an interesting time for the fund’s policy on restructuring.
The IMF’s proposals to change its policy on sovereign debt reprofiling have divided opinion, with FT Alphaville providing a debating platform between supporters (for example here and here) and sceptics including myself (for example here and here).
The proposals are motivated by the objective of providing a fund programme breathing space to work when it is unclear if debt is unsustainable. Read more
Ukraine will probably end this year with public debts over two-thirds the size of its economy. We won’t know the exact figure until March when official statistics come out, nor if those statistics will be able to count the GDP of the separatist east.
But it is not looking good. We thought this rated a reminder.
Sam Jones (formerly of this parish) writes in the FT about how the conflict in Ukraine has revealed the capacity for a new type of warfare.
This is one that has “exploded the notion that expansive communications technologies and economic interdependence were fostering a kind of grand bargain.” Against it, the great power arrayed on the other side can do little, despite its considerable conventional might.
Ukraine claimed at pixel time to have fired on a number of Russian tanks crossing its borders.
Being invaded by Russia is not very conducive to a country’s GDP. But also, bizarre as it seems if its armour really is aflame in the Donbas, Russia is also the owner of Ukrainian sovereign debt. This has some precarious terms (for the borrower) restricting growth in debt to GDP to below 60 per cent. Read more
From the US Treasury’s Office of Foreign Assets Control on Wednesday:
The following transactions by U.S. persons or within the United States involving the persons listed below are hereby prohibited: transacting in, providing financing for, or otherwise dealing in new debt of longer than 90 days maturity of these persons (listed below), their property, or their interests in property…
Note that wording carefully. “US persons” could extend beyond the US. Meanwhile “new debt of longer than 90 days maturity” could extend beyond US dollar debt.
Now note whose debt — not all transactions; debt — US banks, US clearing systems, and US investors may be prevented from dealing with accordingly: Read more
The currency devaluation and official borrowing (to help finance a still-wide government deficit) are expected to push public sector debt up to 57 percent of GDP…
– IMF announcement of $17bn loan programme for Ukraine
Although don’t worry — that’s a whole 3 per cent before a unique debt threshold clause conceivably allows the Russian government to convert $3bn of Ukrainian bonds, which it owns, into demand money. Read more
From the National Bank of Ukraine:
15.04.2014 press release
The National Bank has passed the decision to temporarily disconnect 14 banks from the System of Confirming the Agreements in the interbank foreign exchange market. The regulator resorted to this measure given the actions undertaken by these banks in the foreign exchange market that have a destabilizing effect on of the hryvnia exchange rate and create negative expectations about the future hryvnia exchange rate dynamics.
The prospect of selling any sovereign territory to resolve disputes may seem like a taboo — especially so when it comes to the conflicted territory of Crimea. However, Joseph Blocher and Mitu Gulati, both law professors at Duke University, argue that such a “market” should in future be considered in public international law.
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At least Nomura acknowledge the absurdity… anyway, all Ukrainian roads lead to political uncertainty.
This guest post on the Ukraine crisis is from Jorge Mariscal and Alejo Czerwonko, emerging markets chief investment officer and emerging markets economist, respectively, at UBS Wealth Management.
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There’s a familiar name on the latest Specially Designated Nationals List in the US sanctions against Russia…
TIMCHENKO, Gennady (a.k.a. TIMCHENKO, Gennadiy Nikolayevich; a.k.a. TIMCHENKO, Gennady Nikolayevich; a.k.a. TIMTCHENKO, Guennadi), Geneva, Switzerland; DOB 09 Nov 1952; POB Leninakan, Armenia; alt. POB Gyumri, Armenia; nationality Finland; alt. nationality Russia; alt. nationality Armenia (individual) [UKRAINE2]… Read more
When your creditor takes some of your territory — can you make that territory take some of your debt? Mitu Gulati, a law professor at Duke University, last wrote for us on Russia’s $3bn Ukrainian bond. With Russia reinforcing its annexation of Crimea, Mitu considers Ukraine’s options with its debt after the secession.
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Or, why investors might be less than sanguine about sanctions against Russia.
We could start with the OFZs.
Vladimir Putin’s gave his first official address on the Ukraine crisis on Tuesday.
Among the key points made (via Reuters, and emphasis on our favourite snap):
RUSSIA’S PUTIN SAYS USE OF FORCE IN UKRAINE IS A CHOICE OF LAST RESORT
PUTIN SAYS RUSSIA RESERVES RIGHT TO USE ALL OPTIONS IF THERE IS LAWLESSNESS IN EASTERN UKRAINE
RUSSIA’S PUTIN SAYS THOSE CONSIDERING SANCTIONS SHOULD THINK OF THE DAMAGE THEY MAY INCUR
RUSSIA’S PUTIN SAYS ALL THREATS AGAINST RUSSIA ARE “COUNTERPRODUCTIVE AND HARMFUL”
PUTIN SAYS RUSSIA READY TO HOST G8, BUT IF WESTERN LEADERS DON’T WANT TO COME “THEY DON’T NEED TO”
Depends on how confident you are that the market and economists can predict Putin’s next move, we suppose. Read more
Clear enough where Russian assets are concerned at least… the CBR has
gone to war just hiked by 1.5 percentage points to put a stop to the rouble’s tumble.
The central bank did not mention Ukraine in its statement, but said the decision to raise rates was aimed at preventing “risks to inflation and financial stability associated with the recently increased level of volatility in the financial markets”…
From the introduction to a new IIF paper:
The already acute financial pressures appear to have intensified further in recent weeks, with bank deposits falling sharply, the government out of funding and foreign exchange reserves likely to have tanked to as low as $12 billion by late February. The political change in Kiev has increased odds that Ukraine would receive the urgent financial assistance needed soon enough to avert default. With the Russian bailout likely to be put on hold, this assistance should amount to at least $20 billion this year alone. However, this would require the prompt formation of a new government able to undertake the reforms needed to alleviate the acute macroeconomic imbalances and put the economy on sound footing.
Notwithstanding the approval and publication by the Central Bank of Ireland of the prospectus dated 17 February 2014 in relation to the undermentioned proposed issue of securities, the Issuer hereby confirms that no such securities will be issued.
UKRAINE REPRESENTED BY THE MINISTER OF FINANCE OF UKRAINE Read more
Moscow doesn’t send tanks into revolting former vassals any more. It sends dollars.
For anyone who decides to follow the money when it comes to Ukraine’s split between the EU and Russia, the consequences can sometimes be grimly surreal when it gets to the prosaic matters of bond finance. Read more
Get yourselves an FX reserve-friend, we said…
That’s the Ukrainian hryvnia versus the US dollar on Wednesday — via Reuters. The market’s illiquid and in local trading the rate might have gone through 9. But in case you were curious, the guess is that the fall is down to half political messiness, half general EM messiness — and that it isn’t over. Read more