One Of The World's Best Bond Managers Has Lost $3 Billion In A Huge Gamble On Ukraine's Future

Ukraine APCs flagsREUTERS/Valentyn OgirenkoUkrainian servicemen sit atop armoured personnel carriers (APC) during a ceremony to hand over weapons, military equipment and aircrafts to the army at a firing range January 5, 2015


Michael Hasenstab at Franklin Templeton might not be the Bond King, but he’s got a decent claim to the throne. His fund regularly outperforms markets and his peers. But he’s probably not feeling so princely about his bet on Ukraine any more.

Bloomberg have a great piece illustrating that Hasenstab has now lost $US3 billion dollars on his Ukrainian bond purchases after taking a massive punt on them.

According to The Economist, Hasenstab owns about half of Ukraine’s international bonds. He’s the country’s biggest private creditor.

Here’s Bloomberg on why he may be regretting that:

The Ukraine trade started to unravel in the second half of last year as the government’s finances deteriorated. The maths at this point isn’t encouraging: Ukraine has to make $US14 billion of foreign bond payments over the next three years, an amount that’s almost double the $US7.5 billion of international reserves it has left, according to data compiled by Bloomberg.

And the economy is in tatters. Government officials are predicting a 4.3 per cent contraction this year following a 7.5 per cent drop last year. The military conflict with separatists, which has claimed more than 5,000 lives since it began in April, has snarled business in much of the east of the country.

War is still raging in the east of the country, and what previously looked like it might be a serious but temporary crisis is looking more and more like an embedded problem that will haunt Ukraine for years. Here’s what Hasenstab said about Ukraine in April 2014:

We believe the long-term potential of Ukraine is remarkable. There’s an incredible wealth of human capital and agricultural endowment, and Ukraine holds a strategically important position geographically and geopolitically, straddling Europe and the East. Despite some of its short-term fiscal issues, Ukraine has little indebtedness. Ukraine’s debt-to-GDP ratio is just over 40%1 which we believe is a manageable amount; it’s about half of that of the United States and a fraction of what so-called “problem” countries typically have. When we had first considered Ukraine as bond investors, it made sense to us. Then, the crisis came.

Hasenstab’s funds slipped behind a majority of his peers in 2014, and according to Bloomberg that was more to do with the losses on Ukrainian bonds than any other country.

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