Oct. 17 (Bloomberg) -- Fitch Ratings cut Ukraine's credit ratings as risks about the hryvnia, the bank system and the economy increased.

Fitch lowered the credit rating to B+ from BB- and left the outlook negative, indicating it may cut the rating further, according to an e-mailed statement.

``The downgrade reflects Fitch's concern that the risk of a financial crisis in Ukraine involving a large depreciation of the currency, further stress in the banking system and significant damage to Ukraine's real economy is significant and rising,'' said Andrew Colquhoun, the director of Fitch's Sovereigns Group, said today in an e-mailed statement.

The global financial crisis is hitting more vulnerable emerging markets as investors shun riskier assets in countries with big current-account deficits in a flight to safety. Ukraine has the worst creditworthiness of Europe's emerging markets, based on the cost of credit-default swaps, which protect bondholders against default.

Contracts on Ukraine's debt are traded at 2000 basis points, compared with 458 for Hungary, according to CMA Datavision in London. Hungary also lined up potential funding from the IMF this week.

Current-Account Gap

Ukraine's current-account deficit will probably widen to $15 billion this year, weakening the national currency, the hryvnia, said central bank Governor Volodymyr Stelmakh on Oct. 13.

The shortfall reached 7.2 percent of GDP in the first seven months, or $7.7 billion, as higher energy costs and domestic consumption boosted imports, the central bank said on Aug. 29.

The country is seeking a loan of as much as $14 billion from the International Monetary Fund to help cover the gap, said Oleksandr Shlapak, the first deputy chief of President Viktor Yushchenko's staff today.

``Fitch would view a sizable and appropriately designed IMF program as a positive factor although the agency awaits precise details,'' said Colquhoun. ``However, depositor confidence in the banking system may remain shaky and the economy will face a difficult adjustment even if a program is arranged, extending Ukraine's exposure to financial instability.''

The hryvnia has slumped 13 percent versus the dollar since early September because of turmoil in global financial crisis, the government coalition collapse, and new nation elections, scheduled for Dec. 7.

``The hryvnia is likely to stay under pressure from a widening current account deficit,'' said Colquhoun. `` A relatively high share of FX-denominated lending (51 percent at the end of August) exposes the financial system to risks from enhanced currency volatility.''

Central Bank Support

International credit rating services, including Fitch, say risks surged for Ukrainian banks because of turmoil in the global credit squeeze, fast inflation, a widening current-account gap and political instability in the former Soviet republic.

The Natsionalnyi Bank Ukrainy pledged to support banks and has already injected more than 10.9 billion hryvnia ($2.2 billion) into the banking system this month, almost double what the central bank lent in September.

The Kiev-based central bank also imposed restrictions on domestic lenders to increase credits and return early deposits until ``the situation is stabilized,'' Stelmakh said.

``Fitch is unconvinced that the raft of emergency support measures announced by the central bank will be adequate to shore up depositor confidence and forestall further banking-system stress,'' said Colquhoun. ``New central bank rules restricting loan growth threaten to exacerbate a slowdown in the economy, which could hit banks' asset quality relatively soon.''

Still, ``Fitch believes risks to Ukraine's ability to meet its sovereign obligations remain low in the near term owing to the sovereign's modest refinancing needs,'' said Colquhoun.

For Related News: Stories about the Ukrainian economy: TNI UKRAINE ECO <GO> Stories on Ukrainian inflation: TNI UKRAINE INF <GO>

Last Updated: October 17, 2008 10:24 EDT