October 29, 2015 / 6:13 PM / 4 years ago

IMF to mull lending rule change preserving Ukraine lifeline

WASHINGTON (Reuters) - The International Monetary Fund is expected to soon discuss reforms to lending rules that may allow continued support for Ukraine if it misses payments on a $3 billion debt to Russia, while keeping up pressure on the countries to break the impasse.

An IMF spokesman said on Thursday the fund’s board was expected to debate in the “near future” a possible change allowing the IMF to keep supporting countries if they fail to repay official creditors, or sovereign states.

Russia, which holds a $3 billion Eurobond, has refused to take part in debt restructuring talks with Ukraine aimed at plugging a $15 billion funding gap under an IMF-led $40 billion bailout program.

IMF communications director Gerry Rice urged Russia and Ukraine to talk about restructuring the bond but said the fund would press ahead with a long-mooted review of its lending rules.

“It includes discussion of reforms that would allow the fund to lend in the presence of arrears to official bilateral creditors in carefully circumscribed circumstances,” he told a media briefing.

Efforts to restructure Ukraine’s debt are seen as crucial to shore up its war-torn economy, following a conflict between government forces and pro-Russian separatists in the east.

Russia has argued that the $3 billion Ukrainian Eurobond should be classified as official intergovernmental debt and it continues to demand full payment in December. Ukraine insists it will not pay the debt in full or offer better repayment terms than those offered to other creditors in restructuring talks.

Ukraine said on Thursday Russia had rejected a second chance to agree to a debt restructuring deal, paving the way for a possible court battle.

“The IMF encourages both sides to engage in constructive discussions on the restructuring of this bond to promote the necessary financing for the program being supported by the IMF in Ukraine and to help restore debt sustainability,” Rice said.

Russian President Vladimir Putin said earlier this month the IMF should lend Ukraine the $3 billion to pay off Russia.

The IMF does allow lending to countries that are in arrears to private creditors as long as the country has appropriate policies and makes an effort to negotiate with creditors in good faith.

A 2013 IMF paper floated a change to the lending policy and said having different standards for official and private creditors could create a situation where one or more sovereign lender could effectively veto assistance to a country in need.

Reporting by Krista Hughes; Additional reporting by Alessandra Prentice in Kiev; Editing by Mohammad Zargham and Marguerita Choy

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