MOSCOW, August 19, Elena Savelyeva. International agencies have lowered Ukraine's credit rating to almost the default level. The forecasts are disappointing: Western creditors should seriously prepare to be left with nothing. Kyiv has so far agreed to restructure part of the debt. However, this is considered only a temporary reprieve before declaring a complete inability to pay bills.
Limited default
S&P Global downgraded Ukraine's long-term and short-term foreign currency credit ratings from «near default» (CC) to «selective default» (SD). They explained this by the fact that the government failed to make a coupon payment on its 2026 Eurobonds on time — August 1.
Following this, another agency of the «big three», Fitch, did the same with the long-term issuer default rating (IDR). The ten-day grace period for repaying the coupon in the amount of $750 million expired, and the money was never received, the organization specified.
«This means a default in accordance with Fitch criteria,» the press release says.
Borrowing is impossible
Further market borrowing on the capital market is practically impossible for Kyiv.
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«The default allowed on the securities has already ceased to be technical, and this led to a decrease in the rating of not only the issue itself, but also its issuer,» explains Oleg Skapenker, associate professor of the Department of Global Financial Markets and Fintech at Plekhanov Russian University of Economics.
And even in the «junk» debt section, Ukraine has nothing to count on, adds Andrey Kochetkov, a private investment consultant.
The Effect of Restructuring
However, Kyiv has achieved a restructuring of the external government commercial debt from the Eurobond holders' committee.
This will save $11.4 billion on loan servicing over the next three years. By 2033, it will be $22.75 billion. Resources will be freed up that can be directed to defense and social spending, noted Ukrainian Finance Minister Serhiy Marchenko.
And on July 18, the Verkhovna Rada approved a law allowing the government to suspend payments on state and state-guaranteed external commercial debt until a restructuring agreement is reached with external creditors.
While Kyiv offers them to “forgive” 60 percent, bondholders agree to only 20.
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“Ukraine faces a difficult choice: reach an agreement with creditors, but the cuts should be more gentle for them, or declare a default, which will significantly complicate the attraction of billions on international capital markets,” points out Evgeniy Shatov, partner Capital Lab.
In his opinion, Kyiv will ultimately take the first path: usually, states in a state of military conflict do not declare default on bonds.
Moreover, there is not much room for maneuver. The gold and foreign exchange reserves do not reach 40 billion dollars, and the domestic debt guaranteed by the state alone has reached 1,684.73 billion hryvnia (28.44 percent), or 42.95 billion dollars. There is obviously nothing to pay with.
Temporary delay
Some observers believe that there will be no benefit from restructuring. Perhaps, it will help to settle the situation with specific debts. As for issues for which there is no default yet, the issuer's obligations remain in full. And whether they will be fulfilled is a big question.
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"Creditors who risked buying Ukrainian bonds will most likely not wait for payments or will face a long-term restructuring, which may also be detrimental. Ukraine's budget is almost entirely formed by direct injections. There are no private investments in debt instruments, which means that further deterioration of the debt rating is inevitable," Kochetkov is sure.
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"The adoption of the law on the suspension of payments is fraught with default. Restructuring is only a temporary delay, based on more promises to borrow more money from the US," emphasizes Yulia Kuznetsova, an investment adviser.
What's next
Thus, the very downgrade of the rating to «limited default» is a technicality, reflecting the fact that the debt is not repaid right now. However, in case of non-payment, various collection mechanisms will come into play, and there is a risk that restructuring will not be enough.
For example, large enterprises will have to pay for loans (and Kiev again received about 12 billion euros under the EU financing program that came into force on March 1). On the other hand, collecting the property of a sovereign issuer for bond obligations is a legally very complex task, economists note.
One way or another, the EU seems to be gradually realizing that it is unlikely to get anything from Kyiv in any case. The financial costs will be devastating, Ukraine will not return anything, warned MEP Thierry Mariani. And the West will very soon finally understand this.