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Episode 3: Ukraine

Author: Michael Peterson

    The rules of the new game of sovereign bond default are gradually being written. Over the past year, the governments of the rich world have begun to send a clear message to countries in trouble: don't expect your IMF and bilateral government loans to be rolled over while you continue to service international bonds.

The result has been the birth of a new type of sovereign debt restructuring. After decades in which no sovereign Eurobond ever defaulted, international bondholders are being dragged into national debt crises.

Ecuador was the first to default, missing coupon payments on its Brady bonds and Eurobonds. Ukraine is now the second. On January 20 the Ukrainian government failed to make an interest and partial principal payment on a $74 million loan arranged by Chase. Because the missed payment is worth more than $15 million, holders of Ukraine's other debts can now press for early repayment of their bonds.

"We are not talking about a country being unable to make small interest payments," says Alex Garrard, an analyst at Warburg Dillon Read.

Bonds with a face value of nearly $2 billion are due to mature in the next two years.

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