Ukraine is struggling to negotiate with its creditors to strike a deal, to fulfill IMF’s demands before getting further financial support says George Soros. The Russian aggression has seen Ukraine’s economy suffer a great deal making its current foreign debt ($19 billion) unsustainable. Talks are currently undergoing in San Francisco. Unfortunately, Ukraine has no recourse to bankruptcy as there is no chapter 11 provision for sovereign borrowers. Like George Soros, there is no provision seeking to institute a negotiating period between borrowers and creditors to look at the debts that should be reorganized or mediate negotiations between them. Ukraine and the private lenders can only negotiate on a setting where “might makes right”.
Ukraine’s Negotiating Leverage
In this setting, Ukraine has one option as leverage during the negotiations; threaten to default if it does not get debt relief. However, it is expected that if it chooses this route then bondholders will warn the country that no investors will invest in the country in the long term according to George Soros Ukraine. Sovereign defaults are very costly but, they harbor lasting effects if the lenders decide to drag out the battle like in Latin America (1980’s) or Greece today. If a country and its lenders reach an agreement fast, it will only take a year or two to get back on track. It is not the default that keeps the country outside the markets rather the prevailing economic problems that were at fault for the default first. Source: http://www.nybooks.com/articles/2015/02/05/new-policy-rescue-ukraine/
Brady Plan in 1989
Nicholas Brady, a former U.S. treasury secretary, understood this issue and unveiled a plan to deal with it. It pushed for banks to consider debt relief for at least the countries in Latin America looking for sensible reforms. Brady understood that the savvy investors like George Soros would consider the future as opposed to the past when deciding whether to lend to a country that has defaulted. Brady is presently the chairman at Derby Overseas Investments, Franklin Templeton’s private equity firm. Franklin Templeton is the largest bondholder in Ukraine and is against debt relief. Reconciling the position of Mr. Brady in 1989 to that of today is proving hard.
Ukraine Government’s Efforts
Ukraine government is fighting in a heroic way for the reforms that Brady advocated for back in 1989. These include corruption eradication, judicial system reforms, wean the country from Russian gas, boost agriculture, integrate economy into the EU, clean the banking system etc says George Soros. If debt relief can boost these reforms, investors ought to demand for it like IMF and ignore the perception that it will spell doom. If Ukraine chooses to default as the only means of getting relief then investors ought to applaud rather than condemn Ukraine for choosing it.
Revival of a Sovereign-Debt Restructuring Mechanism
Recently there have been efforts by academics and policy makers to renew a restructuring mechanism of sovereign debts along chapter 11 lines. It’s unlucky for Ukraine and others there are arguments that view default as ruining their reputation, it is against the US bankruptcy code. Chapter 11 views forcing a company (heavily indebted) to pay its debts in full as bad for business making debt relief better. The lenders should state they oppose debt relief openly rather than state that it is not good together with the default option.
Read the profiles of George Soros and Ukraine on Forbes