Kiev could default on its enormous debts as early as next month if it fails to negotiate a restructuring deal with its creditors, The Economist reported on Sunday.
In February 2022, bondholders – including US financial giants BlackRock and Pimco, as well as French asset manager Amundi –granted Ukraine a two-year debt freeze in view of its conflict with Russia. But that agreement expires in August, and Kiev's creditors are anxious for it to begin paying interest on its debt again.
According to the outlet, the arrangement is worth 15% of Ukraine’s annual GDP, meaning that if payments had been required, they would have been Kiev’s second-biggest category of expenditure after defense.
The conflict with Russia has dealt a heavy blow to the Ukrainian economy, which has shrunk by a quarter since the outbreak of hostilities, the outlet said. Kiev’s debt-to-GDP ratio will approach 94% by the end of the year, despite “impressive” Western backing, although this largely comes in the form of “artillery, tanks and earmarked funds, rather than cash,” the article noted.
“Ukraine has a month to avoid default,” the outlet said, adding that the International Monetary Fund (IMF) is keen to negotiate a debt-relief plan, but any such deal is unlikely in the time available.
Last month, the Ukrainian government failed to reach agreement with a group of foreign investors on restructuring the country’s $20 billion debt in Eurobonds. Kiev has been urging bondholders to accept a steep debt writedown as it tries to meet IMF demands to restructure and retain access to international markets.
Ukraine sought to reduce its debt by 60% of its current value, while creditors said 22% was “more reasonable.”
If a new debt-restructuring deal is not reached, Ukraine would end up in default. This would damage the country’s credit rating and complicate its ability to borrow in the future.
Most likely scenarios for Kiev involve an extension on its debt-service freeze until 2027 or the declaration of a default, the outlet said. Either way, Ukraine will not resume payments to its creditors, it added.