Ukraine Lobbies Lawmakers With Debt Vote Said at Risk of Failing

Maidan Square in Kiev, Ukraine

(Bloomberg – – Natasha Doff, Daryna Krasnolutska – September 16, 2015)

Ukraine’s government has stepped up last-minute lobbying because of growing concern that lawmakers won’t back an accord to restructure $18 billion of foreign debt.

Government officials have met with ruling and opposition parties before a vote Thursday that’s supposed to give final approval to the debt deal, according to Prime Minister Arseniy Yatsenyuk. There are risks that the legislation will fail, according to a person familiar with the restructuring, who asked not to be named because the details are private. Another person familiar with the situation put the chances of approval at 50-50.

Rejection of the debt pact would risk complicating Ukraine’s default and its $17.5 billion bailout from the International Monetary Fund, which set restructuring as a condition for the aid. Support for President Petro Poroshenko and his government has ebbed as the coalition seeks to meet the terms of a peace agreement designed to end the 18-month insurgency in Ukraine’s east. Political parties are also being influenced by local elections, set for October.

“There are risks and they are high,” Alexander Valchyshen, head of research at Investment Capital Ukraine in Kiev, said by phone. “Lawmakers are populists from their roots. They won’t have a clear understanding of what is happening, what’s needed to bring the economy out of recession.”

Debt Writedown

The debt accord, sealed in August after months of talks with creditors, envisages a 20 percent writedown to the face value of the bonds, higher average coupons and warrants tied to a recovery in Ukraine’s shrinking economy. After lawmakers approve the deal, Ukraine must give bondholders 21 days to vote on the terms. A self-imposed deadline of Sept. 15 to launch this process has already been missed.

While Ukraine can schedule additional votes in parliament, failure to back the deal this week would mean Ukraine must impose a moratorium on a bond payment due Sept. 23, rather than suspending payment as agreed in the restructuring pact, one of the people said. That security has a 10-day grace period.

“Technically, it’s a default either way,” Fyodor Bagnenko, a Kiev-based bond trader at Dragon Capital, said by e-mail. “But there’s a difference between the default being part of a fully agreed upon process, or as a result of a last-minute rejection by parliament. The latter course wouldn’t look good.”

The $1.25 billion bond maturing April 2023 kept declines, falling 0.6 cents to 76.75 cents on the dollar by 1:17 p.m. in Kiev, the lowest in a week on a closing basis.

‘Populist’ Reasons

Poroshenko has faced a backlash over plans to grant pro-Russian separatists more autonomy over the lands the control in Ukraine’s east, part of a February peace accord signed after mediation from Germany, France and Russia. The passage of legislation on the issue last month prompted violence in Kiev that killed three police officers and prompted a minority party to quit the ruling coalition.

The party of former Premier Yulia Tymoshenko met Tuesday with Finance Minister Natalie Jaresko, though won’t say which way it will vote on the restructuring deal, according to spokeswoman Natalia Lysova. IMF chief Christine Lagarde met with Ukrainian political parties this month in Kiev and urged them to accept the debt plan.

If a lawmaker doesn’t back the debt accord “because of political, populist and false reasons,” it means they don’t support Ukraine’s reforms, which are “backed by the entire free world,” Yatsenyuk said.

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