The credit rating agency Fitch has downgraded Ukraine’s credit rating as the conflict with Russia continues, cautioning that a default is imminent. Fitch moved the country from a CC rating to C after they reached an agreement, at least in principle, with foreign investors for restructuring their $20 billion debt on Monday.

Last week, Ukraine’s parliament approved legislation that will allow the government to suspend debt payments for a period of three months and go into debt default during the negotiations for the restructuring agreement.

The deal will see some of the top global investment funds, such as Amundi and BlackRock, writing off a significant portion of the nearly $24 billion in claims by exchanging current bonds for newer ones that will last for up to 12 years. They will be structured to defer much of the payments that Ukraine would have had to pay in the coming years, reducing what they must repay by 2033 by 75%.

In a statement, Ukraine’s finance ministry noted: “The deal will result in net savings on debt servicing of $11.4 billion over the next 3 years and $22.75 billion until 2033. This will free up vital financial resources, which can be redirected towards defense and social spending.”

The agreement came shortly before Ukraine’s payment freeze on foreign debt payments, which was announced after Russia’s invasion, was set to expire in early August. Defaulting would have created tensions between Ukraine and Western governments, as well as the International Monetary Fund.

Fitch stated: “The reported agreement with external commercial creditors constitutes a distressed debt exchange (DDE) under its sovereign rating criteria.”

They also noted that Kiev’s defense spending made up more than 31% of the country’s GDP last year. They predict government debt will skyrocket to 92.5% of Ukraine’s GDP this year.

Ukraine’s economy has been devastated by its war with Russia, which is now dragging into its 28th month, and it depends heavily on military aid and funding from other countries. It has been spending most of its domestic revenue on its military while using money received from Western countries for expenses such as pensions and public sector salaries.

The loss of people, infrastructure and territory is all taking a toll on the war-ravaged country. Its tax base has been dwindling; its registered civilian labor force in 2021 numbered 11.5 million people and now sits at just 9 million.

G7 countries working out details of $50 billion loan for Ukraine

The G7 nations and the EU reached an agreement in June to use the interest earned on frozen Russian assets to finance a $50 billion loan for Ukraine so it can stay afloat amid the ongoing conflict. Some details still need to be ironed out, however, with the U.S. seeking reassurances from the European Union that the Russian assets it seized will stay frozen until the entire loan has been paid back. Most of the assets are currently being held in the securities depository Euroclear in Belgium.

The money is expected to reach Ukraine by the end of the year. They will be able to spend it on areas such as military, reconstruction, economic needs and humanitarian efforts.

Sources for this article include:

RT.com

FitchRatings.com