Ukraine is struggling to get a good deal from its creditors. It is a precondition that the IMF demands of the country. Talks for getting a good deal for the country are still ongoing. Another factor that has contributed to the hard economic times for the Ukrainian economy is Russian aggression according to George Soros Ukraine. It has made the Ukraine’s ability to pay back its debt unsustainable.
Unfortunately, for the Ukraine, there is no bankruptcy clause according to George Soros. It has left the country in a tough situation. The only leverage that the country currently holds is that it may default on its debt. However, that is a feasible cause of action. If that happens, bondholders of the country could threaten to discontinue investing in the country.
A default by a sovereign entity is usually quite costly. A good example of the lasting effects of sovereign default is Latin America in the 80s. Greece is also another good example. However, if a country can speedily resolve any issues with its creditors, it usually springs back within two years. The underlying economic problems keep a country off the market, not the default.
Nicholas Brady, a U.S. Treasury secretary, perfectly understood this issue in the 80s. He requested the banks to accept debt relief for Latin American nations that were moving towards debt reform. He knew that any problems the countries faced would not affect future investors as long as they showed promise through reform. Reference: http://www.nybooks.com/articles/2015/10/08/ukraine-europe-what-should-be-done/
Today Mr Brady is the chair of one of the largest private bondholders of Ukraine’s bonds. The company he heads is currently fiercely opposed to debt relief for the Ukraine. This is in stark contrast to the position he held in the 80s on the Latin American economies. Meanwhile, the Ukrainian government continues to press on with reform that Mr. Brady proposed in the 80s in Latin America. All these are steps aimed to qualify the country for debt relief.
In recent times, there has been a push by leading academics and policy makers for sovereign debt restructuring. It is already in use in the United States to help companies reorganize their debts so that they can avoid sinking into financial ruin. In the U.S., the law is known as Chapter 11, which assumes that forcing a company to pay off all its debts is bad for business.
The Ukrainian bondholders know that debt relief is bad for them. It will cause them to lose some money on their investments. However, they should admit that it is the only reason they are afraid of Ukrainian debt relief. The current efforts to convince Ukrainian lawmakers that debt relief is a bad thing should not continue. George Soros feels very strongly about this issue.
Additionally, George Soros warns that the E.U should take the issue of Ukrainian debt more seriously. If the Ukraine was able to get back on its feet, it could act as a buffer against Russia. However, the continued hardship that the Ukraine faces only continue to embolden Russia. George Soros is quite concerned about the lack of seriousness in the treatment of a resurgent Russia.
Read the articles about George Soros and Ukraine on NY Books