IMF presents its policy on lending into arrears to official creditors

The IMF presented on Dec. 10 a paper on reforming its policy “On non-toleration of arrears to official creditors” that it adopted a day before. The policy lists the necessary conditions that will allow the IMF to consider lending to those countries in default on official debt: 1) prompt financial support from the Fund is determined to be essential and the country is pursuing appropriate policies; 2) the Paris Club has not provided financing assurances, or a Paris Club Agreed Minute does not exist; 3) the IMF assesses the debtor is making good faith efforts and the official creditor is a holdout; 4) the IMF assesses that the decision to lend into arrears would not have an undue negative effect on the Fund’s ability to mobilize official financing in the future. If any of the four criteria are not met, the IMF won’t be able to lend to a country that defaulted on official debt.

During a Dec. 10 conference call,  IMF representatives declined to answer the question on whether they treat the Ukrainian USD 3 bln Eurobond as debt to an official creditor. They also highlighted that the changes were not designed to insult Russia as their development began in May 2013.

Recall, the Russian state fund that owns USD 3 bln in a Ukrainian Eurobond due Dec. 20 declined in October to restructure it, unlike the holders of other Eurobonds worth USD 15 bln. The Russian MinFin claims the USD 3 bln Eurobond represents official debt that should be treated separately from Ukraine’s other Eurobonds.

Alexander Paraschiy: For Ukraine to secure the smooth continuation of IMF’s USD 17.5 billion EFF program, in case it defaults on its USD 3 bln Eurobond and this Eurobond is recognized as official debt by the IMF, it’s most critical is to comply with the policy’s third criteria (that Ukraine is acting in good faith). In general, it looks like Ukraine is meeting this criteria in the case of the Russian debt (it offered the restructuring, in line with the IMF program, and the Russian bondholder was a minority holdout). However during the Dec. 10 conference call, IMF representative Hugh Bredenkamp explained his view that “good faith” means that the debtor approached its creditor, to whom it owes arrears, as an official creditor. This could be made “either through a relevant grouping of official bilateral creditors or directly.” Ukraine, as far as we know, did not approach Russia in this way (Ukraine declines to recognize this Eurobond as official debt). But, in any case, the IMF board decision on meeting the criteria “allows for the exercise of discretion by staff and the board,” Sean Hagan, another IMF representative, said at the conference call.

All in all, it would be much easier for Ukraine if the IMF does not recognize the USD 3 bln Eurobond as official debt. And the IMF’s resistance to declare any status of this debt plays in favor of Ukraine, we believe. The IMF board allowed this bond’s inclusion in Ukraine’s debt operation, thus implicitly having recognized it as non-official debt.