Cash-strapped Ukraine inches toward crucial debt deal

Ukraine's finance minister said on Friday that Kiev and its private creditors were about to launch direct debt restructuring negotiations that could save the war-torn country from a devastating default.

Natalie Jaresko's comments came as the ex-Soviet state's pro-Western leadership races to meet a late June deadline by which it must find a way to save $15 billion (13.7 billion euros) over four years.

A watertight debt restructuring plan would allow the International Monetary Fund to hand over the next slice of a $17.5-billion loan at the core of a $40-billion global aid package.

IMF executives are yet to name a specific date on which they will discuss Ukraine during their late June meeting.

"We should reach the stage of direct negotiations very soon," Ukrainian news agencies quoted Jaresko as saying.

"That way, we will be able to reach an agreement in an absolutely constructive and conscientious manner."

Ukrainian President Petro Poroshenko on Thursday signed a bill passed by parliament last week giving Kiev "the right, if necessary, to stop payments to foreign debt holders."

The measure is largely symbolic and meant to underscore lawmakers' support for a payment moratorium that could theoretically turn Kiev into a financial outcast that looses access to the international lending market.

Such a freeze would almost certainly prompt Russia -- due a $3-billion loan repayment at the end of the year -- to ask the International Court of Justice in The Hague to declare Ukraine in default.

Moscow has refused to discuss any loan restructuring offer and argued that it technically already has the right to ask for the money back.

Large US private creditors who hold $8.9 billion of the debt have thus far also stuck to their guns.

They have particularly rejected the US Treasury Department and Jaresko's debt "haircut" proposal that slashes the bonds' original value and forces them to assume a loss.

Bloomberg reported on Friday that the creditors -- who include Franklin Templeton and such investment giants as TCW Group and T. Rowe Price -- on May 9 submitted a counter-proposal they said would save Ukraine $15.8-billion over four years.

It reportedly preserves the bonds' original value but extends their maturities by 10 years. Bloomberg said the proposal would also lower the interest payment and allow the original loan amount to be payed back in small instalments instead of a lump sum.

- 'Protracted dispute' -

The Ukrainian government has not publicly responded to the reported offer and Jaresko on Friday called the negotiations "very difficult".

But the deal and the IMF funds that come with it are essential for the Ukrainian government's survival in the short term.

Consumer confidence has been dropping throughout the past 12 months and reached a low of 41.4 points in an April survey conducted by the GfK market research company.

Ukraine's year-on-year inflation rate reached a staggering 60.9 percent in April and industrial output -- already weakened last year by the raging war with pro-Russian militants -- declined by another 23.4 percent.

The threat of inflation climbing even further because of Ukraine's dire currency shortage forced the central bank on Thursday to hold its key lending rate at 30 percent -- a rate that effectively chokes off economic growth.

Analysts say that Kiev is far from guaranteed meeting the requirements necessary to unlock the next IMF loan payment.

Capital Economics emerging market economist William Jackson said the five US investors' approach inched the sides forward but did not guarantee a final deal.

The US group is "reportedly in close contact with other private creditors holding $10 billion of debt, but it's not clear that these creditors have agreed to the proposal," Jackson said in a research note.

Other major Ukrainian debt holders include the UIS heavyweights PIMCO and Blackrock.

"And finally, this proposal doesn't tackle the thorny issue of the $3-billion Russian eurobond," he stressed.

"As yet, it's not clear what will happen with this, but it seems set to cause a protracted dispute."
Source: AFP