Ukraine creditors baulk at proposed 'haircut' as deal deadline looms

Ukraine's biggest private creditors mounted a firm defence Wednesday of their refusal to accept a debt write-off that could keep the impoverished but strategic ex-Soviet nation from slipping into default.

The group of four US investment giants -- who own nearly two-thirds of the $15.3 billion (16.3 billion euros) Ukraine is seeking in debt forgiveness -- denied being too firm with a Western ally reeling from a war with pro-Russian militias across its eastern industrial heartland.

Kiev argues that investors placed their bets in Ukraine's Eurobonds when the government was aligned with Russia and must now bear the partial cost of a 2014 popular revolt against a corrupt Kremlin-backed ruler.

Ukraine's debt restructuring offer would both delay and reduce upcoming interest payments. Kiev also wants to slash the value of the original bonds -- a package of measures that could see creditors get back only 40 cents on the dollar.

The proposed "haircut" on the principal has particularly upset the ad-hoc bondholders' committee.

"A haircut sends the wrong signal to global capital markets when Ukraine can least afford to be shunned," they wrote in a letter published in the Financial Times.

"Ukraine and its business community need access to finance to help spur recovery. That could be put at risk."

The group made no mention of their previous demand for Kiev to dip into its depleted central bank reserves to cover the upcoming payments.

That plan was heavily criticised by International Monetary Fund chief Christine Lagarde on Friday and now appears to be off the table.

- 'Moral obligation' -

The Financial Times argued last week that the bondholders "have a moral obligation to agree to a restructuring that reduces Ukraine's debt to sustainable levels."
The influential paper's comments came as the deadlocked talks over how Kiev could save more than $15 billion over four years hurtled toward a deadline set by the sides for early July.

Kiev had threatened to stop servicing its debts if no agreement was found by the time the IMF decides on whether to stick to its $17.5-million support programme at a board meeting expected within the next few weeks.

The Fund had initially warned that it would find it hard to issue the next loan payment -- $1.7 billion that Ukraine had been waiting for since the end of last year -- without a debt restructuring arrangement in place.

The IMF's cash makes up the core of a broader $40-billion package that includes individual government assistance as well as the credit payment rescheduling plan.

But both Lagarde and her deputy have since signalled that the Fund will keep providing Ukraine with funding as long as it pushes ahead with its prescribed austerity and restructuring plans.

Ukrainian Prime Minister Arseniy Yatsenyuk is due to meet parliamentary leaders later Wednesday to discuss the adoption of a raft of measures the IMF would like to see in place by the start of July.

Kiev is also expected to make a $39-million Eurobond payment Wednesday that would keep the restructuring talks alive.