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11.06.2002 MOLDOVA’S DOOMSDAY: JUNE 13, THE $75 MILLION EUROBOND REPAYMENT DATE (Commentary by Alexander Tanas, INFOTAG’s economic observer)

Of all the external payments to be effected by Moldova during the year 2002, the Ministry of Finance’s largest debt-servicing item is the repayment of a US$75 million Eurobond, due to be made on June 13. The last date when the republic can do this is July 3 – a day till which Moldova will be keeping in tension all the investors keeping the said bonds in their portfolios.

Who are these investors?

If to be sure that the bonds have stayed in the buyers’ portfolios from the purchase moment till now, then we can say that the buyers of the Moldova’s 1997 bonds have been foreign pension funds, investment companies, and banks.

We should mention here that at the placement moment, the Moldovan bonds were fairly popular in the world financial markets. The investors’ real demand was in the excess of $400 million. It exceeded the expectations of Merrill Lynch, which distributed the Moldovan Eurobond, by 2-fold, and the expectations of the issuer, the Ministry of Finance, by 3-fold. The biggest number of interested investors was in London (30) and Paris (15).

At the Bond placement moment, Moldova used to enjoy a reputation of a small former Soviet republic very dynamically implementing democratic and market reforms. In Moldova and outside it, there existed kind of euphoria, a feeling that the reform success was so near, and that in 2-3 years the Moldovan economy would be recognized as a market economy. In this connection, the Eurobond buyers did not have particular apprehensions concerning the papers’ liquidity.

The chief guarantors for the buyers have also been and are the International Monetary Fund and World Bank, which control financial and economic situation in this republic and closely follow the reform course. And, indeed, yield on the Eurobond was also an attraction for the investors.

The Bond was yet a greater attraction for the Moldovan Ministry of Finance. In 1997, a yield of some 10 percent p.a. seemed fairly advantageous. At that moment, none of state officials could imagine that 5 years later Moldovan citizens would agree to keep their dollar savings in Moldovan banks at an interest rate of 2.5-4 percent p.a. An equally incredible perspective then would be the present-time yield on State securities of 6-8 percent p.a. by means of which the MoF jointly with the National Bank of Moldova (NBM) have been successfully solving, all these years, the Budget deficit problem, when a balance of payment gap becomes particularly large.

However, the point is that in 1997 nobody was thinking seriously about the country’s ability or inability to repay its securities.

All these years, Moldova was availing itself of a preferential crediting by the IMF and WB when, on conditions of certain ‘docility’ and ‘diligence’, the Government used to have access to financial resources payable in 30-40 years at interest rates of 0.5-0.7 percent p.a. Certainly, such conditions are incomparable with the terms at which the MoF successfully distributed the $75 million Eurobond in international markets in 1997.

So, the republic is approaching the ‘doomsday’ of June 13, when it will have to discharge its liabilities and to repay the Eurobond to escape a default. This is possible, but only at a very high price, by using the NBM currency reserve. Clearly, this is not the best variant, because the State would then have to go deeper into debts and to further increase its huge domestic commitments before the central bank.

For these reasons, Moldova has been constantly speaking last months that without the external debt restructuring, it would be not able to discharge its $175 million liabilities for the year. The 2002 Budget plans allow for maximum foreign debt servicing of some $137 million, and this projected sum includes new loans from the WB and EU which yet have to be received.

Nobody in banking circles serious speaks about announcement of a default for Moldova. Governmental sources maintain that a scheme of actions for the period of June 13 to July 3 has already been approved. Its essence is in re-scheduling the Eurobond payments, and the experts are 99 percent sure that the scheme will be realized in practice.

A prominent banker believes the scheme may fail only if something really extraordinary happens. Taking into consideration that the sum concerned is only $75 million, one should not cast serious doubt on the Moldova’s ability to restructure the Eurobond repayment.

This means that the Ministry of Finance has, apparently, reached an agreement with a foreign company that would fulfill the repayment mission. One can only guess about which sum is concerned – the entire $75 million or a part of it, for such agreements are usually kept in strict secrecy.

Earlier, rumors in financial circles had it that the Ministry of Finance had been buying back the Eurobond in the secondary markets ahead of time through a foreign company. Experts were offering suppositions that those operations involved the same company which had helped Moldova to happily buy out its bonds from Gasprom concern of Russia.

According to the rumors, Moldova has managed to buy back in the secondary markets 43 percent of the Eurobond, having thus saved $13 million. This should mean that in the period of June 13 to July 3, the MoF will have to pay for only 57% Bond.

Apparently, one should not rule out completely the possibility of the buying back ahead of schedule, and, most probably, this work was done in 1999 through 2001, because nobody was offering the Moldova’s Eurobond for sale since then in the secondary markets. There exist 3 controversial opinions on that topic:

(1) The Moldovan papers did not have a liquidity, so there was no point in selling them. The investors had the only way out – to wait till the maturity day, although this presented a certain risk, because the Republic of Moldova could find itself not able to repay its papers;

(2) The small sums of the Eurobond have been densely structured into investment portfolios, representing a meager share in the parcels, so there is no point in early selling them;

(3) The absence of sales of the Moldovan Eurobond in world financial markets since 2001 is confirming the attempts by a prominent Moldovan bank to obtain some Eurobond into its own portfolio by means of a foreign brokerage company. Even buying the papers at their face value is worthwhile, because the State has promised to pay about 10 percent interest. This is 3 times higher than what local banks pay against citizens’ foreign-currency deposits. However, all the attempts of the said Moldovan bank ended in a failure.

The Fitch IBCA international rating agency Fitch was unable to confirm rumors that the government has been buying back the Eurobond in the secondary markets - perhaps as much as half of the face value – “but it is unlikely that the country would have bought back said debt if it did not intend to repay in June”.

In its press release of June 5, Fitch wrote it had downgraded the sovereign ratings of the Republic of Moldova on two occasions in 2001, eventually moving to a foreign currency rating of `CC` and a local currency rating of `CCC`, both with a Negative Outlook. The ratings currently remain unchanged. At this rating level, there is clearly a very strong chance of debt default materializing within a one-year timeframe. In the absence of multilateral funding, Fitch notes that the Treasury will be faced with a very large funding gap this year.

In Moldova, experts appraised the Fitch’s statements on the ‘doomsday’ eve as fairly “correct” and “balanced”. This gave grounds to bankers to believe that the Ministry of Finance had reached an agreement on restructuring the Eurobond payments.

We believe that the company, that has concluded the restructuring agreement with MoF, could undertake a Eurobond repayment commitment for a short period of time. This can hardly be standard terms of 12-18 years. Most probably, the term might be 5-7 years, after which Moldova is supposed to repay to the partner the Bond’s face value plus a certain commission. In the present-time conditions, the commission cannot be below 5-6 percent per annum.

The Eurobond in question was placed by the world-renowned investment company of Merrill Lynch. In 1997, this was believed to be the Bond’s first issue, to be later followed by other. The sale price was set with a spread of 340 basic points above the yield on the U.S. Treasury’s 5-year bonds.

Now, 5 years later, the country’s economic achievements have turned out to be so moderate that nobody is speaking about any further issues – not because Moldova does not need financial resources, but because the conditions of their placement abroad can in no way suit the Moldovan economy: the interest rates of 15-18% p.a. in foreign currency cannot be afforded by anybody here, and this may only become a reality here when borrowers have a firm guarantee that during the credit maturity period the Moldovan leu will remain stable.

Most probably, this Thursday the Ministry of Finance will not be able to announce the $75 million Eurobond repayment, and the situation will clarify only closer to July 3. After that date, the Ministry will answer how it had managed to resolve the Bond repayment problem and parry the threat of a default.

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