Ukraine calls for debt payment freeze as war ravages economy

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Police officers look at a bus stop, a mosque and buildings damaged by a Russian military strike, as the Russian invasion of Ukraine continues, in Kharkiv, Ukraine July 20, 2022. REUTERS/Nacho Doce

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Kyiv/LONDON, July 20 (Reuters) – Ukraine will ask international bondholders to agree to a 2-year deferment on its debt repayments so it can focus its dwindling financial resources on the fight against Russia, revealed a government resolution issued on Wednesday.

Faced with an estimated 35-45% collapse in GDP this year following the invasion of Moscow in February, lawmakers have instructed the country’s finance ministry to negotiate a carryover of its roughly $20 billion debt by August 15th.

The delay, which many creditors said should be accepted and was quickly backed by major Western powers, would come just in time to postpone about $1.2 billion in debt payments due in early September.

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The government’s resolution posted on its website said “all interest payment dates for the bonds” would be postponed under the plan.

In a bid to avoid what would be considered a permanent default, Kyiv plans to offer lenders, which include governments and many of the world’s largest investment funds, additional interest payments once the freeze completed.

Ukraine has estimated a budget deficit of $5 billion – or 2.5% of pre-war GDP – per month, which economists say pushes its budget deficit to 25% of GDP from just 3 .5% before the conflict.

On top of that, researchers from the Kyiv School of Economics estimate that it will already take more than $100 billion to rebuild Ukraine’s bombed-out infrastructure, while the head of the EU’s powerful financial arm, the European Investment Bank, warned that it could reach trillions. Read more

“We, as official bilateral creditors of Ukraine, intend to provide a coordinated suspension of debt service,” said a group of governments including the United States, Canada, France, Germany, Japan and Britain soon after Ukraine made its proposal.

“We also strongly encourage all other official bilateral creditors to reach an agreement quickly,” the group added.

Wednesday’s decision marked a reversal of sorts for Kyiv, which has repeatedly said in recent months that it plans to maintain debt payments despite the war.

Speculation that a request for a debt freeze could be imminent, however, was stoked last week after national energy company Naftogaz also requested one. Read more

“A proper restructuring has yet to take place,” said Viktor Szabo, portfolio manager at abrdn, which owns Ukrainian government bonds. that is, at least a lasting ceasefire.”

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Ukraine has a multitude of bonds, borrowings that total over $20 billion. The government also plans to postpone the payment of a growth-linked “warrant” offered after its last restructuring in 2015, which aimed to generously reward investors if the economy picks up its pace.

Tymofiy Mylovanov, an adviser to the Ukrainian presidential office, had urged Western countries to increase their financial support in recent weeks.

Global institutions such as the International Monetary Fund, the World Bank and Western governments have pledged $38 billion since the invasion, although nearly 80% of that support has been in loans rather than aid.

Wednesday’s move from Ukraine had little impact on the bonds Kyiv wants to delay. The prices of most of these bonds had already fallen by around 80% since the start of the year, when the build-up of Russian troops on its eastern borders began.

($1 = 29.5000 hryvnias)

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Additional reporting Karin Strohecker in London, editing by Timothy Heritage, Elaine Hardcastle, William Maclean

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