George Soros’ Opinion on Ukraine Deserving Debt Relief

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

George Soros Encourages Debt Relief for Ukraine

Now that voters in the UK have elected leave the European Union (EU), the future of Ukraine is in even more jeopardy.

In a recent article titled “Ukraine & Europe: What Should Be Done?” on the New York Review of Books website, George Soros spells out the financial problems facing his homeland.

Soros, a staunch supporter of Ukraine, continues to warn the world about Russia’s President Vladimir Putin continuing threat to the independent nation. While Putin claims that Russia’s current economic and political difficulties are due to the hostility of the Western powers, led by the United Sates, Soros claims that Russia is the victim of its own aggression.

Putin uses the old ploy of asking the Russian citizens to put up with the hardships they are facing in the name of patriotism. The collapse of oil prices and international sanctions imposed for their annexation of the Crimea region of Ukraine have caused much of their financial instability and shortages.

Soros says the best way to offset that argument is for the EU to offer more support for Ukraine. With the EU now faced with additional countries threatening to leave, closer ties with Ukraine are more important then ever.

George Soros spelled out his strategy that would combine large-scale financial assistance to Ukraine combined incentives for the private sector. In order to move in that direction, he said, the state gas monopoly, Naftogaz, would have to be restructured to move to market-determined prices. For the needy, low-income households, gas subsidies could be provided in order to move away from the current artificially-low price structure. .

Read more:
George Soros – Business Leader, Philanthropist

George Soros – Project Syndicate

In another article published in the Wall Street Journal on August 12, 2015 titled “Ukraine Deserves Debt Relief,” Soros detailed the continuing struggle the country was having trying to renegotiate its debt with the International Monetary Fund (IMF).

There no bankruptcy instrument like Chapter 11 available to Ukraine in order to call a time out to decided which debts need to be reorganized. Because of this dilemma, Ukraine has no choice, other than default, but to negotiate with their private lenders who often take the position that “might makes right.”

In this situation, with its back against the wall, Ukraine might have to do the unthinkable and threaten to default on its outstanding debt. The pitfall there, according to Soros, is that foreign bondholders will threatened and warn Ukraine that a default would cut off any further foreign investment in the country for a very, very long time.

Ukraine’s bondholders admit they have no problem admitting that they oppose debt relief assistance from the EU or the IMF. That is hard to understand, Soros wonders. They certainly take no joy in the loss of their investments that a default would bring.
Soros suggests the bondholders should vigorously try to persuade Ukraine that default would bring years of depression to the country. Instead, the debt holders should be cheerleaders in encouraging debt relief to avoid default.

Learn more about George Soros:
https://www.project-syndicate.org/commentary/george-soros-calls-on-the-eu–and-germany-in-particular–to-take-the-lead?barrier=true

http://www.investopedia.com/university/greatest/georgesoros.asp