Ukraine takes first step toward debt payment freeze

Ukraine's cash-starved government took the first step Tuesday toward freezing the payment of billions of dollars in sovereign and state-backed debt owed to some of the world's most powerful creditors.

The war-torn country is trying to reach an agreement by next month that would save it $15.3 billion (13.7 billion euros) over the coming four years and avoid a potentially devastating default.

A successful debt restructuring deal would guarantee the release of the next part of a $17.5-billion International Monetary Fund loan that forms the core of a global $40-billion rescue for the Westward-leaning ex-Soviet state.

Ukraine's parliament on Tuesday took only minutes to overwhelmingly back a government request for "the right, if necessary, to stop payments to foreign debt holders."

"In case of an attack by unscrupulous creditors on Ukraine, this moratorium will protect state assets and the state sector," the government's legislation promised.

Prime Minister Arseniy Yatsenyuk -- a former banker admired in global financial circles for backing deeply unpopular IMF-prescribed austerity steps -- argued impassionately before the vote that "we can no longer pay these debts out of Ukrainians' pockets."

- Heading toward 'messy outcome' -
Analysts said the new law signalled a bid by Kiev to weaken the resolve of Franklin Templeton and four other major private creditors who hold about two-thirds of the disputed debt and argue that Ukraine has the resources to repay it in full.

"Both parties are upping the ante ahead of next month's deadline for a restructuring deal," Capital Economics emerging markets economist William Jackson said in a research note.

"As we see it, it is in both parties' interest to secure a deal, but it looks like negotiations will go right down to the wire and there is a significant risk of an altogether messier outcome."

Ukraine's obligations through 2018 add up to about $30 billion and includes $17 billion in bonds.

Inconclusive talks and a fast-approaching deadline prompted Ukraine's government last week to admit that it was growing "concerned about the approach taken by the creditors".

The private creditors have reportedly refused to accept either lower interest payments or postponing repayment dates.

But the bond-holders appear to be especially upset by Kiev's plans to require creditors to accept a "haircut" that would markedly reduce the value of the bonds themselves.

"I think no one -- neither we nor the creditors -- wants to see Ukraine's financial circumstances grow worse," Ukraine's US-born Finance Minister Natalie Jaresko told Kiev television.

- 'Undeclared default' -
The law adopted on Tuesday does not cover the debt owed by two state banks and one government-owned company that are conducting separate negotiations.

Yet it does include the $3.0-billion loan that Moscow issued in December 2013 to the since-ousted Kremlin-backed president Viktor Yanukovych in return for his decision to back out of a new economic and political association pact with the European Union.

Moscow has refused to extend that loan's end-of-year maturity deadline and further has the right to demand an immediate repayment should Ukraine be judged to be in default.

It is not entirely clear whether the IMF would have the right to release the next $5.0-billion tranche to should Kiev stop servicing the money owed abroad.

Some economists in Kiev said Yatsenyuk's government was bluffing and unlikely to shake the resolve of hardened financial veterans such as Frank Templeton.

"This would be costly for Ukraine because it is really little more than an undeclared default," said Taras Kotovych of Investment Capital Ukraine.

"I doubt that it this (law) substantially improves Ukraine's negotiating position," Kotovych told AFP.