Facing default, Ukraine gets small debt write-off offer

Cash-strapped Ukraine moved a step closer Friday to avoiding a devastating default thanks to a new offer that would see its creditors accept a small debt write-off.

The proposal that sources said was submitted by Franklin Templeton and three other US financial titans to Kiev this week is far short of the bond value reduction sought by the war-torn former Soviet state.

Yet it still represents the first serious concession from the lenders -- under intense pressure from the International Monetary Fund and Washington to help Kiev's new pro-Western government stand up to what they view as Russian aggression.

The thaw in what had been effectively deadlocked negotiations coincided with a meeting on Friday at which the IMF backed the release of a new $1.7-billion (1.5-billion-euro) payment that keeps Ukraine's $40-billion (36.3-million-euro) global rescue package live.

The IMF said Managing Managing Director Christine Lagarde had stressed to Ukrainian President Petro Poroshenko prior to the decision "the need for continued support for the agreed reforms and to prevent delays or policy reversals."

The Fund-backed Ukrainian lifeline includes $15.3 billion in existing debt Kiev must restructure over the coming four years.

The four US firms who hold about two-thirds of this sum have balked at Kiev's request to accept a 40 percent cut to the face value of their original investment in Ukraine.

But a person close to the discussions said the group was now ready to accept a cut of up to 10 percent.

The source confirmed a report originally run by Bloomberg saying the four US investment houses were offering to take a so-called five-percent haircut to the value of their assets.

The same person told AFP that "there is another five percent on top of that with lots of conditions attached."

Officials said Ukrainian Finance Minister Natalie Jaresko has offered to meet Franklin Templeton's bond manager Michael Hasenstab in a bid to strike a compromise solution next week.

There was no immediate response to Jaresko's invitation from Franklin Templeton.

- Technical default -

Kiev has added to the pressure by warning that it may slip into technical default when its next big Eurobond matures on September 23.

Such a freeze would push Kiev's cost of borrowing even higher and push back Ukraine's prospects for a return to economic growth.
Ukraine must next cover a $500-million principal payment as well as a smaller coupon worth about $75 million.

Deputy Finance Minister Artem Shevalev said on Thursday that he would have a tough time explaining in negotiations why Ukraine was making the September principal payment but hoping to avoid covering others that mature by the end of the year.

"Making the coupon payment is one thing. It shows financial discipline," Ukranian news agencies quoted Shevalev as saying.

"But after paying the body of the bond, it will be very hard to talk to the other creditors -- why we decide to pay someone in September and not someone else later on."

Ukraine's biggest worry is a $3 billion Eurobond that Russia purchased from the deposed government in the wake of its 2013 decision to bow to Kremlin pressure and reject an EU association pact.

Moscow has refused to join the debt negotiations and demands the full amount back by the December 20 deadline.

A person close to the creditors said Western investment houses were taking a far more compromising stand than Moscow.

"As long-term investors in Ukraine, the committee has led efforts to ensure a rapid, mutually acceptable and sustainable debt restructuring, while also retaining the country's vital access to capital markets," the source told The Wall Street Journal.