New law allows Ukrainian govt to penalize ‘unscrupulous’ creditors

By Alessandra Prentice and Natalia Zinets

KIEV (Reuters) – Ukraine’s parliament approved legislation on Tuesday that will give the government the right to ban foreign debt payments to creditors deemed to be “unscrupulous”, as Kiev sticks to its hardline stance in debt restructuring talks.

Ukraine is holding talks to restructure sovereign and state-guaranteed debt to plug a $15 billion funding gap, but negotiations have soured in the past week, as bondholders repeated objections to any writedown on the principal owed and Kiev said that stance showed a lack of good faith.

Creditors need to “help us not with words, but with dollars,” Prime Minister Arseny Yatseniuk said in parliament before the vote.

The law was passed by 256 votes, 30 more than the minimum required.

“Without significant participation from commercial creditors, Ukraine will not be able to stabilize the situation and return to economic growth in 2016,” the government said in a statement.

“In case of attacks on Ukraine by unscrupulous creditors, the moratorium will protect state assets and the state sector,” it said.

Ukraine dollar-denominated bonds fell as much as 1.5 cents across the curve after the government asked parliament to vote on the law, with their yields hitting four-week highs.

The debt of state-owned Ukreximbank <UA050373746=> <UA024373312=> <UA087773728=>, Oschadbank <UA059429469=> <UA059429469=> <UA090643487=> and Ukraine railways, which is also being restructured, will not be subject to the moratorium, the government said.

“This (the moratorium) weakens creditors’ hands a bit as Ukraine are essentially telling them: don’t expect to receive the next payments,” said Gabriel Sterne, head of global macro at Oxford Economics.

On Monday, the bondholder group, which represents in excess of $10 billion of Ukrainian debt and is led by Franklin Templeton, disclosed the identity of other members of the committee, appearing to respond to accusations they lacked transparency in talks.

Russia, which holds a $3 billion Eurobond maturing in December, has declined to participate in the restructuring talks and has said it will turn to arbitration courts should Ukraine fail to meet its debt obligations on time.

“A lot of the debt that is subject to restructuring discussions is governed by international law rather than domestic, so there are limits as to what the government can do to protect itself. It’s a question of jurisdiction,” said Robert Burgess, chief emerging markets economist at Deutsche Bank.

(Additional reporting by Karin Strohecker and Sujata Rao in London; Editing by Mark Trevelyan)

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