Ukraine may default in a month

Ukraine has exactly one month left to pay off its debt to holders of international bonds. If Kiev fails to pay off investors by August 1, the country risks defaulting, The Economist writes .

Ukraine's creditors agreed to suspend debt servicing payments for the entire two years of the war with Russia. In mid-June 2024, investors rejected Ukraine's latest debt restructuring (change in contract terms) in the amount of $20 billion. Ukraine had hoped to reduce the cost of foreign bonds by 60%, but creditors agreed to reduce the price by no more than 22%.

Ukraine has two options. The country's authorities can agree to extend the debt servicing moratorium until 2027. If they fail to reach an agreement, the only option left is to declare default. The Economist believes that these two scenarios are practically the same, because Ukraine will not have the money to pay in the near future anyway. The International Monetary Fund admits that the country will be left "just making ends meet."

Foreign payments from both governments and private creditors account for 15% of Ukraine’s GDP, the second-largest figure after defense spending. Foreign investors include international asset managers Amundi and PIMCO. If Ukraine does default, private investors could lose faith in the country’s Western allies’ support. Moreover, a default would dramatically reduce the country’s ability to rebuild after the war in the long term.

Investors may restructure with a country at war only if the borrower wins the conflict. “There has to be a country that will pay the debt at the end of this,” says one bondholder. But even if they do, investors are skeptical about Ukraine’s ability to quickly recover and return to financial markets. The private sector fears that the burden of rebuilding the country after the war will fall on them, not the government. Rebuilding, which means building infrastructure and civilian facilities, will not bring any profits for creditors.

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