Ukraine eyes September debt repayment freeze

Ukraine's finance ministry warned Thursday it could declare a technical default in two months should its lenders fail to accept less stringent repayment terms and a possible partial debt write-off.

The war-shattered country's words of caution came on the eve of a crucial Washington meeting at which the International Monetary Fund is expected to back the release of a new payment that would keep Ukraine's $40-billion (37-billion-euro) global rescue package live.

But that money includes $15.3 billion in existing debt Ukraine must restructure over the course of the four-year deal.

Franklin Templeton and three other US financial titans who own about two-thirds of this sum have balked at Kiev's request to accept a 40-percent cut to the value of their original investment in the former Soviet state.

Negotiations have been fraught with tensions and Kiev now faces a September 23 deadline to return $500 million and make smaller interest payments on debt issued by a Russian-backed president who was ousted by street protests last year.

Deputy Finance Minister Artem Shevalev said Kiev would have a tough time explaining in negotiations why it was making the September principal payment but hoping to avoid covering others that mature by the end of the year.

"Making the coupon payment is one thing. It shows financial discipline," news agencies quoted Shevalev as saying.

"But after paying the body of the bond, it will be very hard to talk to the other creditors -- why we decide to pay someone in September and not someone else later on."

Ukraine's biggest worry is a $3-billion Eurobond that Russia purchased from the deposed government in the wake of its 2013 decision to bow to Kremlin pressure and reject an EU association pact.

Moscow has refused to join the debt negotiations and demands the full amount back by the December 20 deadline.

- Creditors under pressure -

Ukraine last week made a new debt restructuring offer that IMF Managing Director Christine Lagarde urged the Western creditors to accept.

The IMF chief said Wednesday she hoped "bondholders are sensible about what can be achieved" and expressed optimism about recent "progress".

The two sides have agreed to keep their talks private in order to avoid either Kiev or the investment houses putting pressure on each other through the press.

It remains unclear whether the new Kiev proposal includes the 40-percent write-off that the lenders have so furiously fought.

Ukrainian Finance Minister Natalie Jaresko had said Monday she expected direct talks to resume this week.

And her deputy Shevalev confirmed that discussions at various levels were becoming more frequent and involved.

"I cannot disclose the details, but at the very least, our dialogue has reached a new stage of development,"

Lagarde has signalled repeatedly that the Fund's payments to Kiev's pro-Western government would continue even if no immediate debt agreement is struck.

- 'Put people in jail' -

Most of the $5.0 billion Ukraine has already received from the IMF this year is being used to pay off loans and help soften the blow of imploding living standards and shrinking social benefits.

Economists believe that Kiev's debt to gross domestic product ratio has reached the red-alert level of 135 percent -- more than double what it was at the start of the 15-month separatist crisis gripping the industrial east.

Ukraine's growth is on course to shrink by 9.5 percent and rebound only marginally from its post-Soviet nadir next year.

And Kiev's bid to drum up US investments during a Washington forum two weeks ago concluded with a stern lesson from US officials about the importance of wiping out the corruption still eroding Ukraine's wealth.

"Now, they've got to put people in jail. They've got to actually do it," US Vice President Joe Biden told his Ukrainian visitors.