Guest view: Debt fixes can help rebuild Ukraine

NEW YORK, Jan 11 (Reuters Breakingviews) – Almost 11 months after Russia’s invasion of Ukraine, the country’s tragedy, and that of its people, is staggering. Daily missile strikes bring death, but also reveal remarkable resilience and fortitude. To paraphrase Winston Churchill, it is the end of the beginning, not yet the beginning of the end. Nonetheless, it’s time to look forward to a new beginning for Ukraine.

Just as the Allies began preparing for post-World War Two economic order at Bretton Woods in 1944, so policy planners in Kyiv, Washington, Brussels and London must start the complex and essential process of planning for rebuilding before the conflict ends. In doing so they should deploy the financial innovation which helped to halt the Latin American debt crisis of the 1980s: Brady bonds.

The approach of the United States and President Joe Biden will be pivotal to planning and executing the reconstruction. It requires a 21st-century Marshall Plan led by America and joined by European allies. Direct financing of the rebuilding and recovery will be essential. Ukraine’s leaders, though mightily burdened with the defense of their country, should simultaneously focus on multilateral talks to delineate the outlines of financing and support for the reconstruction that will be essential once the guns fall silent.

The need is huge and grows larger by the day. The World Bank’s Rapid Damage and Needs Assessment, published in August last year, estimated rebuilding costs of $349 billion and rising. A portion of these expenses can come from multilateral development banks. For example, the European Bank for Reconstruction and Development has 520 projects in Ukraine and will play an important ongoing role. But these institutions cannot shoulder the entire burden.

The European Union will be a key part of the solution. Whether its financial backing comes through existing methods or via a new European institution is less important than the output. The funding must be considerable and sustained, for failure to rebuild swiftly would eventually cost Europe more.

Other mechanisms have been discussed, such as applying Russia’s frozen central bank reserves to the reconstruction of Ukraine. The amounts are considerable: at the end of 2021, the Bank of Russia had foreign currency assets equivalent to $62 billion in France, $59 billion in Japan, $99 billion in Germany and $40 billion in the United States, according to calculations based on central bank data. However, the international legal difficulties of this route are significant, and as yet unanswered.

Private sector creditors are also crucial. In August lenders representing approximately 75% of the country’s $20 billion in foreign bonds deferred payment of interest and principal until 2024. Though that is a good start, it is not enough. Debt restructuring talks should commence, drawing on the lessons learned in the past. Specifically, the government in Kyiv should investigate an equivalent to the Brady bonds.

These securities, named after former U.S. Treasury Secretary Nicholas Brady, replaced countries’ existing sovereign obligations with dollar-denominated debt backed by long-term U.S. Treasuries, as part of a negotiated restructuring process. The bonds typically had a maturity of 25 or 30 years. This offered the debtor permanent interest rate relief and protection from fluctuations in borrowing costs. By reducing the sovereign debt burden the program supported recovery and economic growth.

The bonds, first agreed in 1989, were eventually issued by 17 countries in Latin America, Asia, Africa and Eastern Europe. Country-specific Brady plans covered $160 billion, representing a 35%-40% reduction in debt levels. For Ukraine to benefit from similar relief, the U.S. Treasury and other key finance ministries should back new Brady bonds. Ukraine’s finance ministry and the U.S. Treasury should start talks on this possibility right away.

Ukraine’s leaders should seize the opportunity while they have the wind at their back and the support of liberal democracies in confronting Vladimir Putin and Russia. As recent research by the Heinrich Böll Stiftung underscores: “Once there is a clear political will on the part of the creditor governments, action on debt relief can quickly follow.” Regardless of the precise size and makeup of the components of the rebuilding program, allies in the G7 group of nations should work with Ukraine on fashioning the post-war recovery in tandem with multilateral lending institutions.

As winter freezes the ground in Ukraine, missiles explode and power fails, it may be hard to look over the horizon. But the country’s leaders, along with the United States and its allies, must lift their gaze to the contours of a post-war future. The task is urgent but achievable if Ukraine and liberal democracies act together toward this common goal.

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(The authors are Reuters Breakingviews guest columnists. The opinions expressed are their own)

CONTEXT NEWS

William R. Rhodes is president and chief executive of William R. Rhodes Global Advisors and author of “Banker to the World”.

Stuart P. M. Mackintosh is executive director of the Group of Thirty.

Editing by Peter Thal Larsen and Oliver Taslic

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Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.