By Andrew Jay Rosenbaum
ANKARA
Ukraine will meet its creditors on Wednesday in what Finance Minister Natalie Jaresko has called a "last opportunity" to avoid a breakdown.
The minister has warned that a moratorium on payments could be declared if an agreement is not reached.
Ukraine’s government has been trying to restructure its $19 billion in debt, as the conflict in the eastern part of the country puts pressure on its economy.
Most of that debt is owed to the U.S. investment fund Franklin Templeton, which holds $7 billion. Another large part is owned by 14 different investment funds.
Then, of that total, $3 billion is owed to Russia. The Russian government bought a Ukrainian eurobond for that amount in December 2013. Russian authorities have repeatedly refused to consider restructuring that part of the debt.
Creditors, apart from Russia, have proposed to allow Ukraine a 5 percent writedown of the debt, although the reduction is contingent on the country's economic performance.
Ukraine's creditors also want the country to pay down $8 billion in debt using central bank reserves, a move which, Jaresko has pointed out, would be illegal under the country's current laws.
But the Ukrainian government is seeking a much greater writedown, at about 40 percent of the total debt.
The International Monetary Fund (IMF) has made debt restructuring a condition for Ukraine to receive all the tranches of the $17.5 billion bailout that the organization is providing.
The IMF wants to see Ukraine save $15.3 billion of its debt payments through 2018. Kiev has said that this must be done with a substantial writedown, but creditors argue that extending maturities of part of the debt, along with other technical measures, would be sufficient to provide the savings that the IMF requires.
Should Ukraine declare a moratorium on payments, it will face a dangerous deadline on Oct. 3, when a $500-million bond comes due. A default on that bond payment would mean, because of the way the debt is structured, a default on all of the outstanding bonds.
Ukraine's economy is in a parlous state, as GDP has fallen by 23 percent in the last two years. The inflation rate is close to 50 percent. The ratio of debt to GDP is at 158 percent.
The IMF in its May report forecast an economic contraction of minus-9 percent for Ukraine's economy. But, the IMF pointed out, increasing growth would depend on putting an end to the conflict with pro-Russia separatists.
That is not expected to happen in the foreseeable future.
