Ukraine: One Debt Tea Leaf in the IMF Program

The IMF has approved a new 4-year $17.5 billion program for Ukraine, with an immediate disbursement of $5 billion. This is a big economic, institutional, and geopolitical deal. I will comment on one small piece of one small piece: the treatment of Russia's $3 billion loan to the last Ukrainian government, about which I have written at various levels of weediness here, here, and here.

The IMF program is approved under the Fund's existing "exceptional access" (huge $$) policy, which has been interpreted to require debt restructuring unless the country's debt is "sustainable with high probability" (for some of the back-and-forth on the reform proposals, see here, or watch here and here). The Ukraine program therefore expressly hinges on a government and government-guaranteed debt "operation" to achieve sustainability, plus rolling over most of the debts owed by Ukrainian banks and corporations (lots of it to Russia). Brilliant minds are crunching the numbers now to figure out whether Ukraine's bondholders might get by without principal reduction, and without suspending interest payments, based on any realistic set of assumptions.

I am struck by one bit of arithmetic: Ukraine has about $7.7 billion in external sovereign debt payments due in 2015, of which $5.8 billion is principal, of which $3 billion is to Russia  (see p. 138). The IMF document contemplates $5.2 billion in financing from the "debt operation" in 2015 (see p. 12). Since 7.7-5.2=2.5, and since 2.5<3, Russia does not seem to be getting its $3 billion repayment in December. The fact that the IMF board, which includes Russia, approved this scenario, seems important. But (a) the details are super-foggy and (b) I may be missing something, like a big guarantee payment.

The IMF press release says that the debt operation must have "high participation" and be successfully concluded by the first program review, scheduled for June 15. If participation is not high, it would have to be ocean-deep. Since Russia and Franklin Templeton together likely hold more than half of the debt, a deal without both seems inconceivable. On the other hand, the top two creditors also presumably have blocking positions in lots (if not all) bonds for purposes of a restructuring vote--though other creditors could also coordinate to block votes. This will be one fascinating "voluntary" "operation."

To its credit, the IMF document highlights a slew of risks to the program and the debt restructuring operation, all of which seem scary-plausible, especially considering the optimistic gloss that must go with program approval. Buckle up.