The IMF warned Thursday that holdouts could disrupt Ukraine's debt restructuring and undermine the ability to implement a new high-risk $40 billion bailout plan for the country.
The Fund said Ukraine should complete the debt restructuring by June to ensure the new bailout operation can stabilize the country's finances and help restore economic growth next year.
Kiev plans to begin talks Friday with foreign creditors holding tens of billions of dollars in Ukraine debt to achieve some $15 billion in savings over the next four years, just under the $17.5 billion loan the IMF itself is putting up to strengthen the country.
But the success of the program hangs on a successful, quick conclusion of those talks, firm progress on reforms by the Ukrainian government, and maintaining the February 12 ceasefire with pro-Russia rebels who have captured large parts of the country's east.
"The program faces exceptionally high risks," the IMF said in an extensive analysis of the economy and the prospects of the program released Thursday.
Aside from the concerns over the resumption of fighting -- the ceasefire has already been broken a number of times -- the IMF said the debt talks themselves might not be easy.
It said a current effort to roll over private-sector debt payments of $40 billion this year could stumble.
But it also warned that holdouts from restructuring the government's debt could also make achieving the $15 billion in savings difficult.
"Creditors may balk at the terms being offered in the debt operation and holdouts may try to free-ride," the Fund warned.
Thanos Arvanitis, assistant director in the IMF's European Department, said the debt restructuring negotiations were expected to be completed by the end of June.
"We are heartened that the ceasefire agreement of February 12 is holding," he said.
A 5.5 percent contraction of the economy this year and the plunge in the value of Ukraine's hryvnia currency, which lost over two-thirds of its dollar value in the past year, is expected to send the country's debt burden soaring.
The IMF estimated that public debt as a percentage of gross domestic product would rise to 94 percent this year from 72 percent at the end of 2014 and 41 percent the prior year.
The IMF said that stabilizing the country's finances this year would help the economy return to growth in 2016 of about two percent, though that would not include the heavily industrialized economy of the regions held by the rebels.
Even if the debt is restructured and the ceasefire holds, the IMF also reminded that Ukraine, which has failed to meet the requirements of previous IMF bailouts, needs to implement a hefty, detailed list of reforms.
"There are manifold risks that could adversely affect Ukraine's capacity to repay the Fund, and strict adherence to the program will be critical," the new report said.
Questioned Thursday whether the Ukraine rescue could fail like the massive bailout of Greece did in 2010, Arvanitis stressed that the new program is "very realistic".
Even if there are manifold risks, he added, "it is an absolutely necessary program."