By Alastair Macdonald and Noah Barkin
RIGA/BERLIN (Reuters) - The European Union proposed on Thursday offering an additional 1.8 billion euros ($2.1 billion) to help save Ukraine from bankruptcy as Kiev assured Germany it had credible plans to modernize.
With an International Monetary Fund team resuming talks in Kiev, the European Commission offered the medium-term loans to add to the 1.4 billion euros it handed over last year, subject to approval by EU governments and EU lawmakers.
"Europe stands united behind Ukraine," Commission President Jean-Claude Juncker told a news conference in the Latvian capital Riga, where he announced the aid.
The EU's offer came on the day German Chancellor Angela Merkel met Ukraine Prime Minister Arseny Yatseniuk in Berlin. The German leader said later she had heard a convincing case for reform.
But beyond the show of Europe's political support for Ukraine, investors see a growing risk of default with the country's economy pushed close to collapse by a pro-Russian separatist war in the east,
Ukraine's 2017 dollar bond trades around 60 cents in the dollar, down some 40 cents over the past year while the 2023 and 2022 issues are even lower around 55 cents -- an indication of how much investors believe they will recover on every dollar invested.
Billionaire financier George Soros urged the West to step up funding to the country and consider a debt restructuring with private creditors as well as IMF help.
"Instead of a default that would have disastrous consequences, Ukraine should negotiate with its bondholders," Soros said in an essay. http://bit.ly/1zWsrxK
The West's offer of help is just one part of a wider tug-of-war for influence with Russia that has led to economic sanctions on Moscow, the annexation of Crimea by Russia, armed conflict in eastern Ukraine and concern about a new Cold War.
Merkel said that EU sanctions against Russia tied to its intervention in eastern Ukraine could only be lifted if there was full implementation of the Minsk peace agreement signed between Kiev and pro-Russian rebels in September.
Speaking at a news conference in Berlin with Yatseniuk, Merkel said she did not expect separate sanctions tied to Crimea could be lifted as this would require a reversal of Russia's annexation of the territory.
"I have little hope on that front," Merkel said.
"The other sanctions were introduced in response to the intervention in eastern Ukraine. Fulfilling the entire Minsk agreement is the way to bring about a reversal (of sanctions) here. The entire Minsk agreement must be implemented before we can say these sanctions can be lifted."
Speaking in Riga, EU foreign policy chief Federica Mogherini said she saw "some limited positive signs on the Russian side" over Ukraine, while Latvia's foreign minister said talks with Russia last month showed "some signals" of a new approach.
The International Monetary Fund's existing package for Ukraine is worth $17 billion and Ukrainian authorities hope the new round of talks will unlock fresh loans. Some economists say the country is staring at a $15 billion funding gap.
The country faces about $10 billion in debt servicing this year, including corporate and sovereign loans and bonds, according to Hung Tran at the Institute of International Finance, a financial group based in Washington DC.
"If you try to add up the numbers they don't add up, so something needs to be done," Tran told Reuters.
Ukraine hustled through an austerity budget in late December, required for the next disbursement of IMF cash under a program that has so far paid out $4.6 billion in two tranches.
At the time, central bank head Valeria Gontareva said Kiev expected the IMF to release two additional slices of credit before year-end, plus a fifth tranche following their January visit.
With a combined value of $2.7 billion for tranches three and four, a further expected disbursement of $1.4-1.5 billion this month would take the overall figure for overdue and pending payments to over $4 billion.
The European Union and the IMF, whose new mission is expected to wrap up before the end of the month, has said that additional financial help will hinge on Kiev's ability to implement reforms.
Much will depend on how the Fund views the details of Ukraine's budget and a series of austerity laws, including amendments that would impose extra duties on imports.
(Additional reporting by Sujata Rao in London, Natalia Zinets in Kiev, Alexandra Hudson and Robin Emmott in Brussels; writing by Robin Emmott; Editing by Crispian Balmer)