Ukraine Is Too Corrupt for Debt Deal to Work

By Leonid Bershidsky

Ukraine is reportedly close to a deal with its private creditors, who may accept a 20 percent haircut. This is an uneasy compromise that would solve little, because the government continues to fail where it really matters: cutting corruption and bringing the country's huge shadow economy into the tax system.

Ukraine's private creditors, led by asset manager Franklin Templeton, are talking with U.S.-born Finance Minister Natalie Jaresko about restructuring $19 billion of debt. Ukraine's $17.5 billion bailout agreement with the International Monetary Fund requires a deal that would save the government $15 billion over four years through 2018, bring its debt-to-gross-domestic-product ratio below 71 percent by 2020 and keep its gross financing needs to an average of 10 percent of GDP through 2025. The creditors initially told Jaresko that an immediate haircut wouldn't be necessary to meet these conditions: rescheduling and coupon reductions would be enough. The minister, however, demanded a 40 percent haircut and threatened a moratorium on debt repayments otherwise.

The Ukrainian government's argument was one it has repeated ad nauseam at home and abroad. "We are at war with a nuclear state, namely Russia," Prime Minister Arseniy Yatsenyuk said in June. "There is no other way than to accept our terms, restructure the debts and allow Ukraine to get out of a difficult economic situation."

If the two sides meet each other halfway as reports suggest, dealing Templeton's bond guru Michael Hasenstab his first major defeat, Ukraine will get some immediate relief. It has $1.1 billion of sovereign bonds maturing in September and October, and these payments would probably be delayed. However, the $3 billion Eurobond owned by Russia, which comes due in December, won't be affected: Russia insists the loan must be treated as official, rather than private debt -- and Ukraine has been faithfully paying the coupons on it.

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http://www.bloombergview.com/articles/2015-08-25/ukraine-is-too-corrupt-for-debt-deal-to-work