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Sharp GDP Decline and Deteriorating Forecasts
The ongoing war in Ukraine continues to take a severe toll on the country’s economy. Gross Domestic Product (GDP) has shrunk by a quarter compared to pre-war levels, and the central bank is rapidly depleting its foreign reserves. Recent Russian attacks on critical infrastructure have further downgraded growth forecasts. On June 17th, Ukraine’s Finance Minister Sergii Marchenko warned, “Strong armies must be underpinned by strong economies.”
US Aid and G7 Plans
Despite American lawmakers’ decision in April to approve a $60 billion funding package ensuring the supply of weapons, Ukraine’s financial situation remains precarious. On June 13th, the G7 announced plans to use frozen Russian central bank assets to lend Ukraine another $50 billion. However, the country is facing a looming cash crunch.
Debt Moratorium Set to Expire
For the past two years, Ukraine’s creditors have agreed to suspend debt-service payments, providing the state with a 15% annual GDP relief. This moratorium, however, from private creditors such as France’s Amundi and America’s Pimco, is set to expire on August 1st. Ukraine has just one month to avoid default, yet reaching an agreement seems unlikely.
Debt Restructuring Prospects
In June, Sergii Marchenko offered creditors a deal that would cut 60% from the current value of Ukraine’s debts. Creditors, however, deemed a 22% cut more reasonable. The International Monetary Fund (IMF) is keen on a restructuring deal, but creditors are skeptical, especially given the outdated analysis.
Two Paths Out of the Crisis
Without a deal, Ukraine faces two options: negotiating an extension of the debt-service freeze until 2027, or defaulting. Both scenarios imply that payments will not resume. Private investors’ reluctance to lend to a country at war stems from the additional risk that the borrower must win the war.
Long-term Recovery Plans
Creditors are doubtful about Ukraine’s long-term recovery plans. Although allies and the IMF argue that restructuring now will allow Ukraine to re-enter financial markets once the war ends, investors are unconvinced that such a day will come. They see restructuring as the first of many attempts to shift the financial burden of war and reconstruction onto the private sector.
Ukraine’s Finance Minister was right to remind creditors that a country’s army is only as strong as the economy behind it. It is equally important to remember that an economy depends on the army protecting it. The lack of trust between Ukraine and private investors may slow down progress in the country’s post-war recovery.
Source: The Economist.
