Former Treasury Secretary and White House economic adviser Larry Summers took a swipe at what he called “selfish and unconstructive” investors in Ukrainian bonds in a blog published on Sunday, May 17th.
Summers argues that Ukraine deserves a break. “The case for debt reduction is as strong as any that I have encountered over the past quarter century. How the issue is resolved will say much about the extent of international commitment to Ukraine and to resisting Russian aggression. Failure to achieve debt reduction would also confirm the view of those who believe that private financial interests disproportionately influence public policy.”
Ukraine deserves strong international support
Ukraine deserves strong international support because it “has its most reform-minded economic team since independence in 1991.” Moreover, Summers says, the country has made real progress in fighting corruption and moving to curb wasteful energy subsidies. He says that Ukraine has done more in the last 12 months to reform popular but economically unsustainable subsidies than most countries do in 12 years.
Summers argues the “moral, geopolitical, and economic case for the provision of strong support is compelling.” He highlights that the International Monetary Fund has done its part with a $17.5 billion program, but bilateral support from both the U.S. and Europe could be increased and the World Bank should also step up.
Summers says Ukraine bondholders like FTI should take a haircut
Unfortunately, despite the importance, it is not clear that Ukraine’s debt will be reduced. Ukraine’s creditors, which include Franklin Templeton and other major US funds (who, according to Summers, are so embarrassed by their selfish and unconstructive position that they are remaining anonymous) are refusing any debt write-offs so far. If there are a large group of these “free riders,” other debtors will almost certainly not accept writedowns.
As reported by ValueWalk, Franklin Templeton’s Michael Hasenstab has taken a multi-billion dollar position in Ukrainian bonds over the last couple of years, bonds that have lost almost half their value since he bought them.
Summers pulls no punches in saying it “should be unacceptable to taxpayers around the world that their money be put at risk on loans to Ukraine in order that plans be made to pay back creditors in full.”
He goes on to say the IMF and various national governments should call out vulture creditors on their irresponsible greed. Moreover, Ukraine should go into default and not meet its obligations if these vultures refuse a compromise. That said, the international community must continue to support Kiev even in the event of a default. If everyone signs on to this plan, then the Ukrainian bondholders will be effectively forced to compromise.