Ukraine says value recovery instrument could help debt deal: finance minister

"I think that the introduction of the value recovery element is something that can help us reach a consensus agreement," Yaresko told New York-based investors via video conference call arranged by Ukrainian investment bank Concorde Capital.

A value recovery instrument, which can rise or fall in value based upon economic growth rates, is often used in debt restructurings by sovereign governments. It often takes the form of a gross domestic product warrant.

Ukraine is negotiating with foreign bondholders to restructure $23 billion worth of debt, but talks have soured over a disagreement on the necessity of a writedown on the principal of the bonds.

Earlier on Friday the government offered an updated proposal for the debt restructuring. Yaresko warned at a press conference in Kiev that Ukraine would halt debt payments if the bondholders did not agree to a "last chance" offer in further talks.

The ad-hoc group of creditors acknowledged the receipt of the new proposal, which maintains a coupon and principal cut as well as maturity extensions on the debt. Bondholders said they would respond in due course.

Yaresko reiterated her warning to the New York-based investors, saying: "I think it is critically important though that we get over the hump of 'no haircuts.' There is not a solution for Ukraine that simply addresses the liquidity issue. This is a liquidity and solvency problem."

The new offer is based on a worsened outlook for the Ukrainian economy. The forecast is for a 7.5 percent contraction in the economy in 2015, which follows a 6.8 percent contraction last year, due to the financial toll of a pro-Russian separatist conflict in the industrial eastern regions that erupted in April 2014.

However, in her video call with New York, Yaresko said the value recovery instrument could work well for investors.

"There have been differences of opinion between different parties involved about whether or not we, together with the IMF, have underestimated the pace of the future return to growth. And if that has been underestimated and in fact the estimates are too conservative, the value recovery instrument will help I think bridge that gap," Yaresko said.

Ukraine is working toward a target of 71 percent debt-to-GDP ratio by 2020, Yaresko said.

IMF chief Christine Lagarde welcomed Ukraine's effort to reach a deal with creditors and reiterated that the Fund would continue to lend to Ukraine even if a deal is not reached and Ukraine suspends debt payments.

(Reporting By Daniel Bases; Editing by Meredith Mazzilli)