The ongoing war has devastated Ukraine in every aspect: material, human, naturalistic, economic. The horror of the fighting on the field is undoubtedly the most atrocious, but in these times Kiev is also worrying about the “after”wondering how the country will get back on its feet.
Let us remember that Ukraine is currently a technically failed stateprey to debts with third countries, to foreign speculations and a body on which the vultures of post-war reconstruction will swoop down. Hoping the change of hegemonmoving from Moscow to Washington, Kiev has shown that it wants to give up part of its sovereignty once again. A painful but inevitable transition. Yet, lately, the country has avoided and continues to avoid financial defaultcompleting a restructuring of its debt that has few precedents in history.
What is a country’s debt restructuring?
Let’s start by defining the question. Generally speaking, debt restructuring involves an agreement with which the original conditions of a loan (rates, deadlines, currency, guarantee period) are modified to lighten the debtor’s burden. In the case of a national state, we speak of sovereign debtwhich concerns the budget of the public machine. Area in which Ukraine is in dire straitssunk by non-free aid and war financial loans and, as if that were not enough, prey to large pockets of corruption.
Only public bodies or privately owned companies that are in a situation of crisis or insolvency can benefit from debt restructuring. A striking example is that ofArgentina in January 2005. The country unilaterally restructured its debt of about 82 billion dollars and the offer was accepted, after having made economic terrorism on the internal situation, by less than 50% of private individuals in Europe, the United States and Japan. The figure declared by Argentina, never certified by the relevant international institutions, was 76.15% acceptance.
Restructuring of Ukraine’s sovereign debt
Since the now very distant February 2022, the Ukrainian Treasury has not been able to refinance itself on international markets. National bonds are rated at state bankruptcy levels: CC by S&P and Fitch, CA by Moody’s. A few months after the large-scale invasion by Russia, Ukraine’s financial advisor, Rothschild & Co.he handed over to the person responsible for the country’s public debt a very large “black folder”detailing the major sovereign debt restructurings of the past 30 years. That was the moment that would pave the way for the economic turnaround of a nation embroiled in its worst conflict since World War II. The official Yuriy Butsa he was struck by the reading of the package that arrived from Washington, obtaining a degree of expertise in the matter that he was unable to acquire in 2015 because he was not involved in the debt restructuring requested by Kiev after the annexation of Crimea by Russia.
As explained by Reutersfaced with an economy paralyzed by the costs and destruction of war, In August 2022, Ukraine agreed with creditors to suspend payments on its bonds. With no plausible end to the conflict in the short term, Kiev signed a treaty at the end of August 2024 one of the fastest and largest debt restructurings of history. Eclipsed in size only by Argentina and Greece, the restructuring of more than $20 billion in debt will save the government led by Volodymyr Zelensky a whopping $11.4 billion over the next three years. A vital sum for both the current war effort and the International Monetary Fund program tied to the country.
“A stable situation, in which there are no more substantial doubts, can only benefit Ukraine,” noted Arvid Tuerkner, head of Ukraine and Moldova at the European Bank for Reconstruction and Development, one of Kiev’s key multilateral partners. The economic survival of the Ukrainian state machine has so far been guaranteed exclusively by loans from so-called “allies”:
- nations such as the United States, Great Britain, Canada, France, Germany and Japan;
- large American and European financial groups;
- international institutions such as the World Bank and the International Monetary Fund, which alone have already guaranteed over 85 billion dollars.
The account of how the agreement was reached between Ukraine and bondholders is based on interviews with five sources involved in the talksboth governments and investors, who agreed to speak to Reuters on condition of anonymity.
Why Ukraine’s creditors agreed to a debt haircut
From a technical point of view, after February 2022 Ukraine had obtained a two-year moratorium on debt paymentsup to the Expires August 2024. At that point, still embroiled in a terrible war of attrition, Kiev seemed to have no other choice: to declare default. The admission of insolvency and the condition of a non-autonomous budget surprisingly led to an agreement with the creditors. All thanks to a clause inserted in the assistance program for Kiev, of about $15.6 billionconcluded by the IMF in March 2023.
The Western intention, that is to say of the American administration, was clearly to do not aim to bleed Ukraine dryas instead happened in other cases of supranational debt and default. For information call Greece or Argentina. The fear was that a country torn apart even in its morale could throw itself into the arms of a Russia weakened but renewed in its imperial intentions, with Mighty China lurks ready to take advantage of it. This is how the EU Commission also pushed for a “fair agreement” on the restructuring of Ukrainian debt, committing together with Washington to repay part of Kiev’s 2024 public budget deficit: an operation of about 43 billion dollars.
Shortly before the August deadline, and precisely July 23, 2024at the end of a three-day negotiation, the guarantee offered by the Franco-British institute Rothschild & Co. led to the approval of the restructuring of the national offshore debt, that is, matured by international private creditors. Among these are giants of the caliber of BlackRock, Fidelity, Amundi, Amia Capital and Pimco. Previously, in June, talks broke down after a couple of weeks, with the central committee of bondholders complaining that the devaluation requested by Ukraine was “significantly higher” than the 20% that most had expected. But then everything unblocked. As specified by The Manifestoit is about “19.67 billion dollars issued in Eurobonds, which rise to 23.6 billion if we consider the interests accrued so far”. In financial jargon, the agreement involves a double move that has generated new credit titles with a lower nominal value: swap (exchange) and haircut (cut). In short, Ukraine’s creditors have accepted a 37% devaluation of the securities which they legitimately held. Net of interest, which however has been adjusted to follow the trend of the national economy (which at this point will be revised upwards next year).
The trap behind the “magic”
The future economic scenario for Ukraine, however, is not all rosy. The same European Union that has rhetorically exposed itself, according to the American dictate, for the restructuring of Ukrainian debt has also fought to stigmatize this procedure. To the point that in December 2023 the very definition of “restructuring” of sovereign debts was bleached out by the summit on Eurozone reform. A move more propagandistic than anything else, for keep the standard high of an increasingly divided Europe, but to which new and very important states aspire in their aversion to the ever-widening anti-Western front.
Despite the propaganda, Brussels continues to follow the classic dictates of the sovereign debt restructuring process. Starting from the ways in which it is activated financial assistance from the European Stability Mechanismopen only to countries whose debts are deemed sustainable. If they are not, they must be restructured. Generally speaking, this practice of deficit restructuring does not solve long-term problems. Instead, it sweeps them under the carpet.
Despite the hoped-for recovery of Ukrainian public resources, in over two and a half years of war the country has completely at least a third of its economy dissolved. The celebrated rebound recorded in 2023 was equal to 5% and, even admitting a jump linked to Western intervention, experts say that the situation will not be able to return to previous levels the conflict. Not to mention that the future of Ukraine will necessarily have to pass through agricultural production. Another big problem, given that the cultivable surface area throughout the country has lost as much as 20% of the land. A problem that appears insurmountable if we also look at the destruction of most of the roads and logistics arteriesin addition to energy facilities. For a total reconstruction bill that currently exceeds 500 billion dollars. With the still very open question of the use of frozen Russian assets, not supported by the European Union, and the uncertainty about the behavior of the country’s bond indicators in the future.
