Ukraine, creditors agree to meet next week to “narrow the gaps”

Ukraine’s Finance Ministry published a joint statement with the ad hoc creditors committee today, following a July 15 meeting in Washington between Finance Minister Natalie Jaresko and the committee representatives. “Further progress was made on a number of substantive issues and the parties have agreed to focus their attention on narrowing the gaps,” according to the statement. Further meetings have been scheduled for next week as the parties, for the third time, expressed their wish to conclude the talks as soon as possible.

Before the statement’s release, Jaresko confirmed in Washington the same day her previous statement that the introduction of a moratorium on debt repayment by Ukraine should not be ruled out, reported the Ukrinform news agency.

Alexander Paraschiy: We do not know for sure what were the “substantive issues,” but based on earlier open letters between the Finance Ministry and its creditors, the biggest divergence was in regards to Ukraine’s proposed haircut. Creditors did not want to discuss that earlier, but now the talks seem to have shifted from whether to do it at all to what size it should be, to the advantage of Ukraine. The gap, which should be narrowed according to the statement, between the view of creditors and MinFin (which is demanding about a 40% cut) could be huge indeed. This statement, therefore, confirms our expectations that the debt operation will involve the haircut, but we continue to expect it will be minimal (let’s say 5%-10%).

The key wild card for the next week is whether or not Ukraine will pay the USD 120 mln coupon on its 2017 bond on July 24, as had been scheduled. This date looks like an important threshold for both sides: Ukraine will have the opportunity to threaten a moratorium to reach some deal by that time, while the creditors are interested in not spoiling their relationships with MinFin by that date to improve the likelihood that they will get paid. We see MinFin as having enhanced bargaining power for the next week, which it should be able to use effectively.