By Marc Jones
LONDON, March 17 Ukrainian bond prices are
holding up better than expected in the stand-off with Russia
because investors think the International Monetary Fund might
not impose tough conditions in an expected aid programme due to
Kiev's political importance to the West.
Rather like Pakistan in 2001, which was seen as key in the
fight against al Qaeda, some in markets say the IMF, from which
Ukraine is seeking financial support, could hand it the money it
needs to avoid a default without many of the usual strings.
By normal measures, Ukraine's debt to GDP of around 40
percent is not high enough to arouse concerns, but the
combination of its being at the centre of a geopolitical
tug-of-war and a tumbling currency has seen bets on a default
This year's near 15 percent dive in the hryvnia has
increased the debt burden and it could quickly spiral if the
turmoil causes capital to flee and banks are left with funding
holes the state would need to fill.
The uncertainty is rising after Crimea's mainly
Russian-speaking population voted overwhelmingly to join Russia
on Sunday. Aside from the complexities of a split, it has raised
suspicions that other pro-Moscow parts of Ukraine will fall
under Russian control.
Rating firms have warned there is a sizable risk of default
by Ukraine but markets are hedging their bets, suspecting the
Cold War-tinged politics may ultimately determine the outcome.
While bond buyers are demanding more to hold Ukraine's debt
and the price of insuring it has risen in recent
weeks, there is nothing to suggest a
Greece-style scenario where investors lose 70 percent of their
"Obviously Ukraine's debt to GDP is high so they need
relief. There is no doubt about that, but I think it is not a
purely economic issue anymore," said Salman Ahmed, a global
fixed-income strategist at the investment arm of private bank
"In Greece there was no territorial issue in play. If the
West wants Ukraine to align with them rather than Russia they
will have to offer a carrot and the carrot could be better terms
on the debt."
THROUGH GRITTED TEETH
Ahmed likened the situation to the IMF's dealings with
Pakistan in late 2001 when Islamabad got approval for a $1.3
billion loan as the West courted it as an ally in the fight
against terror in the wake of the 9/11 attacks.
Kiev has $3 billion dollars worth of foreign currency bonds
due before the end of September and though it still has
sufficient reserves, the view among analysts is that running
them down too far could spook investors.
The safer alternative is to call on the IMF. Gabriel Sterne
at emerging market specialist Exotix, says the Fund's current
preference, and the tactic it used in Greece and Cyprus, is
rather than just give new Pakistan-style loans, to get
bondholders to agree to give struggling countries more time to
Sterne thinks the situation is different to Pakistan because
Kiev has more debt on its books than Islamabad did, meaning a
restructuring would be more meaningful. But he feels that with
so little time to organise one the result may end up the same.
"They may well just stump up the money through gritted
teeth," he said.
The IMF declined to comment on its talks with Ukraine but
its head, Christine Lagarde, said last week it should finish its
fact-finding mission there by Friday.
Kiev has asked for at least $15 billion, but officials at
the Fund and places like the European Bank for Reconstruction
and Development, acknowledge it will need to be quite a lot
Markets appear to be thinking along similar lines to Ahmed
and Sterne. They are pricing nowhere near the kind of pain that
Greek debt holders suffered.
Ukraine's June eurobond is selling with a discount of 8
percent off of its face value whereas for the longer-term, but
often more sought after 2017 and 2020
benchmarks, are showing a 14 to 17 percent
"A loss in Ukrainian bonds is not really priced in," said
Regis Chatellier a sovereign strategist at Societe Generale.
"The lowest they are trading at is around 82 (versus face value
of 100). If people thought we were going to see a Greek-style
restructuring they would be at more like 50."
The other issue complicating the situation is the money
Russia recently lent to Ukraine in the form of a bond when its
former pro-Moscow president Viktor Yanukovich was in charge.
Kiev has far it has received 3 billion of what was meant to
be a $15 billion package but Moscow's grab of Crimea has sparked
debate on whether Kiev is likely to ever pay the money back.
The bond has a couple of special clauses that have added
spice to the debate. Russia can demand instant repayment if
Ukraine's debt to GDP hits 60 percent and it also carries 'pari
passu' (equal) status with Ukraine's eurobonds.
That means that if Ukraine doesn't pay Russia back, unless
it also didn't pay its eurobonds, Moscow could easily go through
the courts to get the money.
But ultimately bond market experts say it is likely to come
down to a political decision - whether or not the West and the
IMF dangle the easy-money carrot.
"We are seeing East against West, which makes it more
difficult for the IMF," said Zsolt Papp, who helps oversee $2.6
billion of emerging-market debt at Union Bancaire Privee in
Zurich. "Ukraine is just the pawn here."