Zelensky Suspends Ukraine’s Foreign Debt Payments Starting Aug 1st

Who could have seen this coming? Ukraine’s President Volodymyr Zelensky has signed a new law which defers public debt payments until October if necessary, Reuters has confirmed. The bill was signed by Zelensky and returned to parliament on Wednesday.

The government now has the authority to postpone payments on external public debt until restructuring negotiations are seen through, which could then see a moratorium held that would formally mark a sovereign default.

“It is necessary to introduce, for the period of transactions to change the terms of borrowing, temporary measures related to the servicing and repayment of debt obligations and a moratorium on satisfaction of creditors’ claims,” the bill released by the president’s office said.

The clock is ticking on debt restructure as a payment freeze agreed upon two years ago will soon expire (on Aug.1), and as Reuters notes: “Earlier this month, Ukraine announced a preliminary deal with a committee of its main bondholders to restructure its near $20 billion worth of international debt.”

Bondholders must still approve the deal, which is likely, given the plan has the support of foreign governments.

Exactly one week ago, Fitch Ratings downgraded the country’s long-term foreign currency issuer default rating from the “CC” level to the lower “C” level.

“The reported agreement with external commercial creditors constitutes a distressed debt exchange (DDE) under its sovereign rating criteria,” Fitch said.

Reuters further reviews that the proposal would see “a 37% nominal haircut on Ukraine’s outstanding international bonds, saving Kyiv $11.4 billion in payments over the next three years – the duration of the country’s program with the International Monetary Fund, according to government statements.”

It was in February 2022 that Ukraine reached a hasty agreement with its creditors to freeze payments of some 23$ billion till August 2024 amid the backdrop of the Russian invasion. Since then Kiev has been almost completely reliant on foreign aid.

This was all long ago predicted, including by EU parliamentarians, given that the longer the war drags on the closer the war-ravaged country is to defaulting…

The Ukrainian state is reeling, unable to finance services its people desperately need. But billions in EU financial assistance are not free; they’re loans, which #Ukraine will default on. Meanwhile there is little oversight or assurance the funds are going where they should. pic.twitter.com/CKTRtvXfPk

— Clare Daly (@ClareDalyIRL) December 6, 2022

Following what now inaugurates a period of a short-term debt default, private bondholders are likely agree to push Ukraine’s debt payments until 2027, thus seeking to minimize the impact on Ukraine’s ability for long-term borrowing.