Article by: Yury Vinnichuk
Ukraine is being compared with problematic Venezuela and Argentina which allowed default to happen. Loan givers do not believe in our country.
Ukraine’s ‘default insurance’ has reached its maximum price since 2013. As such, on October 17, according to Deutsche Bank, Ukraine’s credit-default swaps (default insurance) have reached a maximum of 1402 for five-year bonds.
In simple terms, if an investor bought $10 million bonds from Ukraine, the insurance of sovereign risk (from possible default) will cost them $1,4 million annually. To compare, a year before such insurance cost $909 thousand for the same loan sum.
Today Ukraine’s loan bonds are in third place in terms of risk among 50 countries.
Venezuela takes second place, which this and next year have to return $17 billion of debt given to them before the presidential elections in 2012. Meanwhile only $20 billion remain in the country’s reserves. The situation is made more difficult due to the fall in prices on oil, the main export product of the country. “All the while, the Venezuelan government is not ready to make unpopular decisions such as devaluing state currency,” wrote The Economist in the beginning of October. Default insurance on Venezuelan debt costs 2067 points for five-year bonds.
And the leader of the anti-rating is Argentina, which allowed default in the end of June, even though its government never acknowledge it. This is the second default the South-American state is going through in the past 13 years. In 2001 the government of Argentina froze the citizens’ savings accounts. Mass protests and clashes with the police broke out in the streets, which resulted in several deaths.
The cost of current loans for Ukraine today is higher than it is, say, for Egypt or Kazakhstan.
“The loan cost for Ukraine is extremely high, as it is classified by international agencies as a pre-default country. De facto, today on the global market Ukraine’s default probability is viewed at 15%,” says head of projects with the League for Financial Development Andriy Blinov. “Overall Ukrainian sovereign bonds are profitable at a 20% annual level, which is extremely high for a European country.”
According to the specialist for bond sales at Dragon Capital Serghiy Fursa, investors do not believe in Ukraine due to high risks.
Since the beginning of the year, Euromaidan happened in Ukraine, Viktor Yanukovich and company fled, Russia occupied Crimea, separatist movements started in Donbas and, as a consequence, so did Ukraine’s war with terrorists and Russian troops, ruined industries and hryvnia’s 60% devaluation in relation to the dollar.
By the end of the year, Ukraine is to face a 8,3% GDP fall and over 20% of inflation. “Look at our ratings, they are extremely low,” Fursa says.
In 2014 rating agency Fitch lowered Ukraine’s rating to pre-default levels. Moody’s lowered the rating of our country (with a negative prognosis) to the level of Greece, Cyprus and Jamaica.
Ukrainian business bonds are now sold with great discounts. According to Fursa, Ukrlandfarming bonds are now sold at 65% of its nominal value, the discount is 35%. The discount on the bonds of the biggest mining and metallurgy holding Metinvest, belonging to Rinat Akhmetov and Vadym Novinsky, is 30%, and 40% for DTEK (which also belongs to Akhmetov).
Some companies, such as agricultural holding Mriya or the Kharkiv state-owned aviation factory, allowed a technical default. Recently Metinvest asked loan-givers to restructure a $500 million loan until November 2017.
Other companies, which have to pay their debts by the end of 2014 – 2015, will follow its example. The Ukrainian government is still silent about intentions to restructure even part of the loans and assures that Ukraine will not allow default to occur.
Finance experts aren’t this optimistic. “I would not be so sure that Ukraine will not allow default. It is the worst-case scenario, of course. It is not a cure but a trauma to the economy,” says executive parter at Capital Times Eric Nighman. “Once again, it is possible that selective debt restructuring may occur.”
In the end of 2013, after Yanukovich met with Vladimir Putin, Ukraine sold $3 billion Eurobonds to Russia with the payment due in December of 2015. The conditions of this agreement state that if the limit of the state debt surpasses 60% of Ukraine’s annual GDP (according to 2014 measures), Russia can demand that Ukraine pay the debt early.
As of the beginning of September, the state debt to GDP-2013 ratio constituted 61,8%, while in the beginning of the year the number was 43%. According to the IMF, Ukraine’s debt as a state in 2014 will constitute 67,6% of the GDP, and 73,4% in 2015.
“Everyone expects that Russia will demand early payoffs for the $3 billion Eurobonds and this will provoke Ukraine’s decision to declare default,” says Nighman.
Overall in 2015 Ukraine has to pay back $9 billion to the loan-givers. Another $5 billion and $8 billion are due in 2016 and 2017, respectively.
Ukraine plans to pay the debts using the funds it receives from the IMF. So far out of the $17 billion prescribed in the two-year program, it has received $4,4 billion in 2014.