Ukraine faces debt crunch as moratorium expiration looms

The latest issue of the British weekly The Economist writes that Ukraine has a month to avoid bankruptcy. For the past two years, creditors have agreed to suspend Ukraine's debt repayments, but the moratorium from private foreign bondholders expires on August 1.

"The Economist" notes that this suspension—from governments and private lenders—is worth 15% of Ukraine's GDP annually. If payments were required, they would be the second largest state expenditure after defense.

The International Monetary Fund wants Ukrainian Finance Minister Serhiy Marchenko to negotiate partial debt forgiveness, but reaching an agreement in such a short time seems unlikely. In June, he proposed a deal to creditors that would reduce the present value of debts by 60%, but they responded that they consider 22% more reasonable, explains the weekly.

The weekly assesses that if Ukraine fails to meet its obligations, it will indicate a troubling lack of faith by private investors in the West's commitment and in the longer term, this could spell disaster for the country's reconstruction.

Ukraine desperately needs fiscal space. By the end of the year, its debt-to-GDP ratio will approach 94%—very high for a country with such a turbulent financial history and size. The amounts supplied by allies are impressive but come in the form of artillery, tanks, and earmarked funds, not cash. Only $8 billion from the latest American package will go directly to the Ukrainian government, equivalent to just over a quarter of Ukraine's annual spending on social benefits, and even that is in the form of a loan. The EU plans to offer a little more, but still only $38 billion over three years, reports "The Economist."

It adds that although Ukraine's debt relief suggestion is modest—$12 billion from 2024 to 2027—it has no free funds to allocate if it is not granted. According to the IMF, under such a drastic restructuring deal as the one proposed by Ukraine and rejected by bondholders, the country would barely be able to make ends meet.

"The Economist" explains that Ukraine has two options in the absence of an agreement. One is to negotiate an extension of the debt servicing freeze, as already done with non-private creditors who will forego payments until 2027. The second is insolvency. It may sound drastic, but the difference between these scenarios is minimal. Either way, Ukrainian payments will not be resumed, reads the weekly.

As it notes, the restraint of private sector investors does not reflect just Ukraine's financial prospects. In normal restructuring, creditors bet on the country's economic outlook. Lending to a country at war also involves a second risk: whether it will win.

Bondholders are also skeptical about the plans for Ukraine's long-term reconstruction in the event of victory. Although allies and the IMF argued that restructuring would allow Ukraine to re-enter financial markets as soon as the war ends and its allies forgive debts, investors are not convinced that such a day will ever pass. They rather believe that restructuring would be the first of many attempts by Ukraine's allies to shift the financial burden of the war and the costs of reconstruction from governments to the private sector, writes the weekly.