Ukraine vs. Franklin Templeton Investments, Round 77

A lot off the top, a lot off the side: Ukraine seeks to give its creditors a sizable haircut.

The unprecedented example of IMF lending to a country in the midst of civil war demonstrates US influence even now at the institution. If you are on America's side, the IMF will find all sorts of loopholes for you...but even if it means screwing over US investment concerns? At the moment, Ukraine is in rather worse financial straits than Greece, which at least is not in any danger of dismemberment. Yet, there are two conflicting interests with regard to the American treatment of Ukraine. On one hand, it wishes to keep the (American-recognized) Ukrainian government in Kiev intact in fear that further chaos will erupt if matters deteriorate financially and another regime is installed. However, the interesting thing is that many of Ukraine's largest creditors are American fund managers who mistakenly thought that either (a) the country's situation would stabilize in the near future or (b) Western powers-that-be would not give them a "haircut" if push came to shove.

A haircut is, simply, writing off the value of obligations. For instance, a 50% haircut would mean that Franklin Templeton Investments would only be repaid 50 cents for every $1 of face value of Ukraine sovereign bonds it possesses. For Ukraine, it's literally a life-or-death, lose-lose situation: They can stop paying creditors and be declared in default, but that *may* help fund the war effort. Or, they can continue paying their creditors but have less funding to keep whatever remains of (Western) Ukraine intact. What's interesting with the former choice is that the Yankees may be willing to allow Ukraine to shaft US investment funds to help keep Ukraine afloat:

Ukraine's premier warned Friday that Kiev will freeze its debt repayments if no immediate deal is found with private lenders because it has to fund its escalating campaign against pro-Russian fighters. Prime Minister Arseniy Yatsenyuk said on his return from a visit to Washington that the International Monetary Fund had given his embattled government a few weeks' reprieve to enact laws needed for the release of new loans.

But the Western-backed cabinet leader said the IMF had signalled its willingness to let Ukraine restructure debts at its own pace -- and that interest payments to Western commercial lenders and Russia may stop as early as next week."Today, Ukraine spends as much on foreign and domestic debt servicing as it does on defence," Yatsenyuk told a government meeting.

"The budget can no longer afford it -- and not just the budget. The Ukrainian people can no longer live like this," he said. "We will not take money out of Ukrainians' pockets to pay foreign debts."

So there you are: the United States may effectively be condoning Ukraine's default. Insofar as the likes of Franklin Templeton and BlackRock do not have holdings in the tens of billions of these papers, these large fund management firms should be able to cope anyway. US/IMF indifference appears to be emboldening Ukraine in dealing with its creditors:

The creditor group negotiating with Ukraine over its $19 billion debt restructuring has no plans to revise a proposal that was rejected by the nation’s government, a person familiar with the talks said. The bondholders oppose writedowns to principal because they’re not necessary to reach the International Monetary Fund’s targets and would therefore lead to restricted capital-markets access for the sovereign and companies, said the person, who asked not to be identified because the talks are private. Even if it did agree to a writedown, other creditors wouldn’t accept it, they said.

Ukraine’s Eurobonds fell the most in almost three months this week as a verbal battle between the government and creditors escalated. Finance Minister Natalie Jaresko said Wednesday that the country will stop servicing its debt if no progress is made on talks. The bondholder committee, led by Franklin Templeton, said yesterday it’s “deeply concerned” by Jaresko’s stance.

A two-month impasse in negotiations is hardening as coupon payments come due this month and a $500 million note matures in September. Jaresko has repeatedly said that any restructuring agreement must include a so-called haircut to the face value of bonds while creditors have insisted that is not necessary to fulfill three IMF-mandated targets.

So it appear that, with Uncle Sam's approval, the electric shavers are being readied for some action on Ukraine's creditors.