Ukraine and different perspectives on burden-sharing

21 May, 10:16 AM

I have been on a few panels and investor sessions in recent weeks on the economic outlook for Ukraine. 

At most of these, the issue of burden-sharing and debt restructuring has inevitably come up. 

At face value, Ukraine is saying and doing all the right things - paying its debts even in extreme circumstances.

All this just helps reinforce the view that the Ukrainians are the good guys - playing by all the rules and holding to contracts. This is what has helped Ukraine win the international PR war and ensured strong Western backing.

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Ukraine came into this crisis with a decent macro and public finance profile - a fiscal deficit of 3-4% of GDP and a public sector debt to GDP ratio of sub-50%.

It ran a close to balanced current account position and held close to $30bn in FX reserves. Market external debt due to year-end was pretty light at a few billion bucks. 

But the war has decimated public finances and estimates are that Ukraine has a budget financing shortfall of close to $5bn a month. Now so far it has received around $11bn in Western financing and this week got another promise from Western allies of close to $17bn in additional financial support.

This should see it through to the fall, at least, if fighting continues. But unfortunately, most of this Western support has come in the form of loans - sad that the West is only lending Ukraine the money to fight this war which is really providing a bulwark for the West against Russian aggression.

But assuming that remains the case, and if the war continues to year-end, with a possible 30-40% real GDP contraction, Ukraine’s debt/GDP ratio could well then be over 100%.

I assume Ukraine will service its debts - or be helped to service its debts by Western official creditors - while the war is ongoing. I doubt the West would want Ukraine to face the distraction and disruption of default and debt restructuring while the guns are still sounding.

But once the war ends a DSA with a 100% plus/minus public sector debt to GDP ratio might suggest debt restructuring/reprofiling is in order. The public sector likely will roll out the usual jargon of “burden-sharing” by the private sector - as with the 2015 restructuring.

All pretty much par for the course.

But I just wonder if this time around all parties can think outside the box and think of new innovative solutions.

Burden sharing does not necessarily have to involve debt restructuring if large international financial institutions can see the bigger picture here and commit new money to match that of the official sector.

Debt restructurings are typically lose-lose scenarios. Investors get NPV reductions, suffering losses. Sovereigns get NPV contributions but at the price of lost market access, long depressed credit ratings, and higher resultant borrowing costs.

What if there was a win-win here? 

The big international institutions see Ukraine’s battle for what it is, theirs, and our battle to defend Western Liberal Market Democracy - systems on which their success and profit depend.

Lots of talks here of a new Marshall Plan for Ukraine with tens of billions contributed by the Western official sector, and perhaps ultimately funded by attaching frozen Russian assets.

But what if Western institutions saw the big picture and pledged to match the official contribution?

Big financial institutions talk the talk of ESG but as one investor on a panel highlighted this week - supporting the Ukraine rebuild will be the best/brightest ESG story/opportunity in our generation.

We would be backing Ukraine’s and our own very system of Western Liberal Democracy - Ukraine is our front line against fascism and kleptocracy.

They can now walk the walk by pledging big-ticket contributions to Ukraine’s rebuild - and thereby underpinning Ukraine’s creditworthiness for years to come. This financial backstop - official and private - would keep markets open and borrowing costs low for Ukraine, multiplying the capital inflows and potential for investment. It will ensure Ukraine’s successful rebuild, and economic recovery which I think will be the best antidote to Putin and Putinism.

Now is a billion bucks each for the big Western banks/financial institutions that much here given what Ukraine is trying to achieve for all of us.

And for these financial institutions what a PR gift to be able to say they were anchor investors in Ukraine’s Marshall Plan (call it the Zelensky Plan as the guy's bravery deserves acclaim here).

They will also surely benefit from future opportunities which will surely come in financing a huge investment boom that will come as the country sets about reconstruction.

We just need to think big and outside the box here.

Finally, this crisis has shown the power of ESG - through self-sanctioning by Western firms exiting Russia because of the moral repulsion now realized from dealing with the Putin regime.

How about making Ukraine the alter ego for all that. So for the same companies, the morale reasons that drive them to exit Russia should be exactly the reasons for them to commit to Ukraine and enter the Ukrainian market.

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