NBU Council head suggests restructuring local bonds if NBU rejects QE

Bohdan Danylyshyn, the head of the Council of the
National Bank of Ukraine (NBU), believes the NBU should purchase local government
bonds for UAH 160 bln on the secondary market, he wrote in his blog on Apr. 9.
In case the NBU doesn’t pursue this quantitative easing approach, he
recommended the Cabinet of Ministers to initiate talks on restructuring all
local bonds due in May-December 2020. The total amount of payments on local
bonds that are due in May-December is UAH 128 bln, of which UAH 20 bln will be
payments to non-residents, he estimated.

Recall, the NBU Council removed on Mar. 31 a restriction of the central bank on purchasing local bonds on the
secondary market, as well as recommended the NBU board to determine the amount
of a possible bond purchase that won’t jeopardize price stability.

Alexander Paraschiy:  This
is the first time in over a decade that a high-profile official has openly
voiced an idea to default on local bonds. Clearly, initiating such a 
“discussion” significantly raises the default risk of local bonds and therefore
reduces their attractiveness, especially for non-residents. So far, the
restructuring option is not being considered seriously, neither in the cabinet
nor in the NBU board. So we expect Danylyshyn’s idea will not have any
practical consequences.

This is primarily because most of the local bonds are
being held by local banks, with the vast majority being concentrated in state
banks. Defaulting on local bonds, therefore, will have deeply negative
consequences for state banks’ capital. Therefore, such a debt operation won’t
be much helpful for the government. So far, Ukraine has a chance to avoid QE
and more painful debt solutions.