Ukraine's premier warned Friday that Kiev would freeze its debt repayments if no immediate deal was found with private lenders because it had to fund its escalating campaign against pro-Russian fighters.
Prime Minister Arseniy Yatsenyuk said on his return from a crunch visit to Washington that the International Monetary Fund had given his embattled government a few weeks' reprieve to enact laws needed for the release of new loans.
But the Western-backed cabinet leader said the Fund has signaled its readiness to let Ukraine restructure debts at its own pace -- and that interest payments to Western commercial lenders and Russia may stop as early as next week.
"Today, Ukraine spends as much on foreign and domestic debt servicing as it does on defence," Yatsenyuk told a government meeting.
"The budget can no longer afford it -- and not just the budget. The Ukrainian people can no longer live like this," he said.
"We will not take money out of Ukrainians' pockets to pay foreign debts."
An upsurge in fighting that has claimed at least 40 lives since last week has threatened a shaky truce deal the foes and Russia had signed off on under strong EU pressure in February.
Foreign monitors have since accused both sides of returning their heaviest weapons to the front in apparent preparation for a return of full-scale warfare in the 14-month eastern campaign.
- Creditor anxiety -
Growing security concerns have been compounded by seemingly deadlocked talks with foreign creditors who soaked up Ukrainian Eurobonds in far more peaceful times.
Kiev is up against seasoned financial heavyweights such as Franklin Templeton and other titans who believe that Ukraine has the funds stashed away in its central bank to repay its debts in full.
Ukraine's Finance Minister Natalie Jaresko has firmly refused to do so -- a position that has left the private lender increasingly anxious and Russia visibly irate.
"We are deeply concerned about the stance (Jaresko) is taking, which is not in the interests of Ukraine," Kiev's four biggest commercial lenders warned in a joint statement Thursday.
And Russia said it may ask the International Court of Justice in The Hague to declare Ukraine in default if it fails to make a scheduled $75-million interest payment on June 20.
Jaresko and Yatsenyuk mainly want to see the IMF back the quick release of a $1.7-billion loan that forms part of a $40-billion package the Fund and Ukraine's foreign allies have put together for the coming four years.
The Fund's board had been due to discuss Ukraine by the end of the month and initially set a debt restructuring deal as one of its main conditions.
That tough stance has since softened. The Fund's second in command said Kiev might be able to sneak through a loophole "called lending into arrears" that allows IMF payments to countries in technical default.
- IMF leniency -
But Yatsenyuk's team had thus far been unable to ram through parliament three vital pieces of legislation the Fund still wants to see before parcelling out the remainder of its slice of the global assistance deal.
One demands broader central bank independence. The other two aim to streamline the inefficient energy sector and clean up the financial mayhem reigning in Ukraine's cash-draining state oil and gas firm.
Ukraine's parliament is expected to debate all three measures next week.
Yatsenyuk said the IMF would now wait until July before tackling the tricky Ukrainian loan.
"We expect the (IMF) board to meet in July," he told cabinet members.
"So, all the preliminary conditions have to be agreed and approved by July."