Ukrainian Debt Restructuring Deal 2015:Is VRI Beneficial for Ukraine?

Khrystyna SydorchukIvan Franko National University of Lviv

Student Conference“Ukraine at 25: evaluation of the past

and plans for the future”21st March 2016

Content1. What is Debt Restructuring?2. Ukrainian Debt Restructuring Agreement 2015:

reasons and conditions3. Calculation of future VRI payments4. Conclusions5. Q&A

The Debt Laffer Curve adopted by H. Krugman

[“Market-based debt reduction for developing countries. Principles and Prospects ñ The World Bank”. Krugman H. 1992]

Sovereign DebtRestriction: no more than 60 % of GDP

[Stability and Growth Pact]

The USA (105 %)Belgium (106,7%)

Japan (245,9 %)France (97 %)

etc.

Borrow more vs. change deal conditions

can be defined as an exchange of outstanding sovereign debt instruments, such as loans or bonds, for new debt instruments or cash through a legal process.

Sovereign Debt Restructuring

Debt rescheduling Debt reduction

“haircut” debt redemption securitization

* The Debt Reduction Facility (IDA)

* Brady Plan (N. Brady 1989)

Ukraine1991

No debts

201577,6% of GDP/ $70,5 bn

(including $46 bn of external debt)

Factors:- deep economic recession - constant budget deficit- war in the Eastern Ukraine- election campaign- pessimistic spirits in the society, etc.

• 20% ($3,6 bn) nominal haircut of the foreign debt;• increase in the coupon yield on the bonds – from 7,22 to 7,75%;• four-year maturity extension on repayments (payments will start

in 2019 till 2027).

Ukrainian Debt Restructuring Deal 2015

- no nominal value;- payments are linked to the GDP dynamics;- annual payouts could start from 15/06/2021;- payments will be capped at 1% of GDP.

Value Recovery Instrument

Real GDP growth < 3% nominal GDP < $125,4 bn no payouts

3% < Real GDP growth < 4%

Real GDP growth > 4%

pay out 15% of the real GDP growth

pay out 40% of the real GDP growth

concerning dynamics of the Ukrainian GDP during 2015-2018

Expectations of the international financial institutions

2015 2016 2017 2018% $ million % $ million % $ million % $ million

IMF -11 88 428,60 +2 90 197,20 +3,5 93 354,00 +4 97 088,30WB -12 87 435,00 +1 88 309,30 +2 90 075,50 +3 92 777,80S&P -15 84 454,30 +2 86 143,40 +3,5 89 158,40 +4 92 724,70

* compiled by the author

Dynamics of annual VRI payments depending on GDP growth

20242025

20262030

20352040

0

200

400

600

800

1000

1200

1400

annual GDP growth 3,5%annual GDP growth 4%annual GDP growth 4,5%

$ m

4021,6

2085,5

5958,3

Total, $ m:

* compiled by the author

Annual GDP growth, %

FV of VRI payments,$ m

Time period, (number of years)

PV of VRI payments,$ m

3,5 2 085,5 2026-2040 (15) 1 152,5

4 4 021,6 2025-2040 (16) 2 125,9

4,5 5 859,3 2024-2040 (17) 3 007,4

Present Value

FV – money that have to be paid in year k, n – a period of time (number of years),i – interest rate, 7,75 %

PV of VRI payments < Restructured debt ($3,6 bn) * compiled by the author

Conclusions1. PV of VRI payments < Restructured debt ($3,6 bn).2. If there is a steady growth (more than 3%), payouts

will not be burdensome.3. The result depends on the way

of economic development Ukraine will choose.

Ukrainian Debt Restructuring Deal 2015:Is VRI Beneficial for Ukraine?

Khrystyna SydorchukIvan Franko National University of Lvivchristina.sydorchuk@gmail.comhttps://www.facebook.com/christina.sydorchuk

Student Conference“Ukraine at 25: evaluation of the past

and plans for the future”21st March 2016

Thank You for attention!