The holders of Ukrainian state bonds still have until the end of next week to respond to the government's request in Kyiv for a two-year moratorium on payments.

But the rating agencies have already passed their verdict: They question the fundamental ability of Ukraine, which is at war with Russia, to service long-term foreign currency debt.

Andreas Mihm

Business correspondent for Austria, Central and Eastern Europe and Turkey based in Vienna.

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New uncertainties about grain exports after the shelling of the port of Odessa do not raise expectations of a stabilization of Ukrainian agricultural exports either.

Before the invasion, they accounted for one-fifth of the export value and were an important source of foreign exchange.

In any case, Scope Ratings and the Fitch agency, which is more important on the market, have already downgraded Ukraine's creditworthiness to "C", the lowest level before default.

Kyiv is further promoting this by forbidding the state-owned company Naftogaz from serving due papers.

High military and humanitarian costs

The two-year delay in payments requested by Kyiv affects 13 Ukrainian state-owned Eurobonds worth about $20 billion, of which $3 billion will mature by July 2024, according to Dennis Shen of Scope Ratings.

With the deferred interest payments on the Eurobonds, savings by 2024 would be around $5 billion.

The restructuring would ease the funding pressure on Kyiv.

The suspension of debt service would be a signal to private Eurobond borrowers.

At the end of April, non-sovereign Eurobond debt stood at $6.5 billion, according to Scope Ratings.

Two weeks ago, under pressure from the government, the state-owned company Naftogaz asked its creditors for a two-year deferral of repayment and interest.

After they refused and wanted to pay Naftogaz, which the group considers itself financially capable of, the government prevented this, he said on Monday: "At the time of publication of this announcement, Naftogaz has not received any government approval and is therefore unable to provide any funds for payments to the bondholders.” They now want to talk to the creditors again.

Fitch had previously downgraded Naftogaz to "C".

Other Ukrainian companies, such as Dtek Energy, part of billionaire Rinat Akhmetov's empire, are rated little better.

The risk of future non-payments remains high

The recession, the uncertainty of war and the risk to long-term sovereign debt sustainability, according to Scope Ratings, "increase the likelihood that a larger restructuring of debt could be required in the medium term after a possible suspension of selected external debt".

A prolonged conflict with Russia increases military and humanitarian costs and delays the prospect of a full economic recovery.

A long-term reconstruction program would affect debt sustainability even if the recovery progressed.

Fitch also assumes that Ukraine and its creditors will not be able to avoid restructuring their debts.

Only the timing is open.

Even if creditors currently accept the offer for a moratorium with the necessary two-thirds majority, the risk of future non-payments remains high "as the government is trying to maintain liquidity in the face of acute pressure on military spending".

Given the considerable international goodwill towards Ukraine, there is a likelihood that it is heading towards debt relief in the longer term, writes Scope Ratings' Shen.

Moreover, the downgrade of Ukraine's foreign currency loans will have limited, if any, impact on official aid from the EU, US or other multilateral or bilateral organizations.

In fact, the relief efforts of multilateral creditors and financiers have already accelerated in view of the acute financial difficulties in Kyiv, as shown by a group of G-7 countries that have suspended debt service for Ukraine until at least 2023.

They had also asked other creditors to do the same.

Kyiv also relies heavily on domestic financing via local currency bonds.

Of the nearly $25 billion it had raised as of July 21, 2022, the equivalent of $7.7 billion was raised through the central bank and another $4.2 billion through local government bond issuance.

A little more, just under 13 billion dollars, was donated by international donors such as the USA, the EU, the World Bank and the International Monetary Fund.

Another $20 billion has already been pledged.

The high credit financing reflects the tense economic and financial situation in Ukraine.

Economic output will probably collapse by a third this year, and tax revenue has also fallen.

An excessively large proportion of the financing is therefore secured by loans, which poses a problem for national debt in the medium term.

According to unanimous estimates, the budget deficit will reach a record high, and national debt will almost double to around 90 percent.

Inflation was close to 22 percent in June.

The central bank is trying to curb the expected increase to 30 percent with record interest rates of 25 percent.

Analysts such as Deutsche Bank and Raiffeisenbank International are already preparing for further rate hikes.