Even the best investors have losing investments, and Ukraine is a case in point for famous bond manager Michael Hasenstab. As Ukraine’s economy first began to wilt in mid-2013 when politics got messy and Russia’s intentions became clear, Hasenstab, the international bond manager of Franklin Templeton (a global financial firm with more than $800 billion in assets under management), bought several billion dollars worth of Ukrainian government bonds. Analysts note Hasenstab was following his usual pattern as a “vulture” investor, buying distressed assets and hoping to sell them for a big profit at a later date.
Hasenstab known as a gambler
Hasenstab is known as a gambler in the financial industry. He took over Franklin’s international bond department in 2001, and has become known as a maverick who takes takes in countries suffering economic crises. Hasenstab made a big bet on Irish government bonds back in 2008 a-2009 that made profits of close to $2.5 billion as Ireland’s economy improved.
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Hasenstab made his first bet on Ukraine, a nation known for its corruption and chronic political instability, back in 2013. He explained the investment by saying it was a good risk due to its educated population and its access international financial aid via the IMF.
Things went from bad to worse in Ukraine
Things haven’t turned out quite like Hasenstab had planned. He bought the Ukrainian bonds at a cost of around 80 cents to the dollar, and the current value is now around 50 cents to the dollar.
“The war in the East, along with domestic political tensions and delayed reforms that have deferred the disbursement of foreign official financing, have put Ukraine at the brink of an economic collapse,” explains Lubomir Mitov, chief economist for Europe at the Institute for International Finance.
Ukrainian GDP shrank by an alarming 7.5% in 2014, and most experts believe another 6% decrease is in store this year. Furthermore, Ukraine’s debt-to-GDP ratio is likely to hit 90% by the fourth quarter. Ukraine’s currency lost 50% against the dollar in 2014, meaning it will cost twice as much to pay off the $10 billion worth of foreign debt maturing by the end of the year. Analysts have noted that Kiev’s debt load is becoming increasingly unsustainable.
The Ukrainian bond investments Franklin Templeton made are in bad shape. The IMF gave Ukraine a $17 billion loan last year, but the country has requested more cash to get it through the next few quarters.
Natalie Jaresko, Ukraine’s finance minister, put up a Facebook post saying she’s is looking for “consultations” with bondholders in order “to improve medium-term financial stability.” This, of course, is financial doublespeak that really means that it’s time for Ukraine to sit down with its creditors and talk about restructuring its foreign debt.