Ukraine took a further big step towards default when finance minister Jaresko threatened on 10th June 2015 to declare a moratorium on debt repayments.
A moratorium is simply another word for default.
Ukraine has already passed legislation allowing it to impose such a moratorium (see It Begins: Ukraine Takes First Real Steps To Default, Russia Insider, 19th May 2015)
With Ukraine’s private Western creditors continuing to resist pressure from Washington to agree to Kiev’s demands for a restructuring, the prospects for default are growing greater.
In the face of what is increasingly looking like an inevitable default the Western powers continue to throw Kiev a financial lifeline.
It seems that even if Kiev defaults on the debt it owes its Western creditors, the IMF may try to continue to provide Kiev with financial support on the grounds that Kiev is implementing “reforms”.
This is nonsense. There is no sign of any reform, as opposed to promises of reforms.
There is also the small matter that the continued support being talked about contradicts what the IMF was previously saying.
When the restructuring negotiations were first launched a few weeks ago the IMF was saying that a restructuring was an essential precondition for its aid package. It seems that the political imperative to support Ukraine is however so strong that aid will continue to be provided regardless of whether a restructuring is agreed or not.
Beyond that serious legal questions arise over whether the IMF should be providing support to a country that is threatening to default on its debts. It looks like a bank continuing to lend to a bankrupt customer.
Whilst it might in theory be legally possible for the IMF to continue to provide support if Ukraine defaults exclusively on its private debts, its creditors might in that case say that any money the IMF provides Ukraine should be paid by Ukraine to them to settle the debt Ukraine owes them. If the creditors press this demand through court action then it is easy to see how this situation could become very messy.
In the meantime it is entirely possible the IMF’s hints of continued support for Ukraine might be causing the creditors to harden their stance.
The fact that Ukraine is now openly threatening to default on its debt to its private Western creditors, taken together with the IMF’s hints of continued support regardless of whether Ukraine defaults or not, should be seen as further proof that the debt negotiations are deadlocked.