August 28, 2015
The Ukrainian agreement with its most important private bondholders is a highly significant development for us, not only in terms of the mildly positive implications for Ukraine itself. The agreement contains two components - a haircut and a GDP linker - both of which are very likely to be relevant in the upcoming discussion on Greek debt.
The agreement concerns $18bn worth of the country's total debt load of $72bn, and affects 11 government bonds and 3 government-backed bonds. The haircut on the principal is 20%, or $3.6bn. The bonds will be swapped into 9 new bonds with longer maturities, which constitutes a de-facto maturity extension of four years.
Bloomberg has a good summary of the warrant. We think any discussions on Greek debt will have to include a similar component. In the Ukranian case, bondholders receive a warrant, which gives them a contingent payment stream from 2021 until 2040. The principal trigger is for GDP to exceed $125.4bn (against a projected $84.3bn this year. In other words, GDP would have to rise by 50% for this whole thing to become effective). In addition, at that point real GDP growth must exceed 3%. The warrant guarantees a payment of 15% of the value of GDP growth between 3 and 4%, and 40% of the value of GDP growth of above 4%. There is a total cap of 1% of GDP between 2021 and 2025.
Frankfurter Allgemeine questions whether the agreement could result in a return to solvency for the country. Ukraine had previously asked for a haircut of $15bn. The country's GDP is projected to fall by 8.7% this year according to one forecast, although there have been some recent signs of economic stabilisation.
We also have stories on the latest political developments in Greece, including the appointment of an interim caretaker prime minister and Tsipras' declaration that he will not a head a coalition government; we also note that Yanis Varoufakis is dropping out of Greek frontline politics, while contemplating the foundation of a European movement; inflation expectations in the eurozone have fallen again lately; we also have a discussion and comments on the ECB's endorsement of a fiscal union.