Oct. 10 (Bloomberg) -- The cost of protecting against a default by Ukraine's government soared to a record after President Viktor Yushchenko called early elections and the central bank took control of the country's sixth-largest lender.

Credit-default swaps on Ukraine's $14.9 billion of state debt jumped 473 basis points to 1,700, the biggest one-day advance, according to CMA Datavision prices in London. The cost indicates the highest risk of default among Europe's emerging markets, Bloomberg data show.

``It's a panic,'' said Dmitri Isupov, who manages $1 billion in Ukrainian assets as head of Dragon Capital in Kiev. ``International investors think the place is in chaos.''

Ukraine joins Iceland, Germany, the U.K. and Belgium among European countries taking over lenders in the biggest banking crisis since the Great Depression. Regulators halted trading indefinitely on Ukraine's main PFTS stock index today as Yushchenko called a meeting with bank chiefs and central bank governor Volodymyr Stelmakh, who canceled a visit to Washington.

Ukraine is dependent on foreign investment at a time when credit markets around the world are frozen, after more than tripling its current account deficit to $7.7 billion from about $2 billion a year ago. Annual inflation soared to a record 31 percent in May and was at 25 percent in September.

Pimco Holdings

Elections scheduled for December will be the fourth in five years.

The former Soviet republic is divided by language and politics into a Russian-dominated east and Ukrainian west. Yushchenko and Prime Minister Yulia Timoshenko, who swept to power in the Orange Revolution of 2004, tore apart their coalition on Sept. 2 after months of disagreement over Ukraine's relations with Russia were exacerbated by the war with Georgia.

While Yushchenko is seeking closer ties with the European Union and North Atlantic Treaty Organization, Timoshenko joined with pro-Russian parties in the parliament to strip the president of some of his powers.

The political deadlock is driving away investors amid the region's worst financial crisis since Russia's default and ruble devaluation a decade ago.

``In hindsight we should have sold everything,'' said Andrew Bosomworth, who helps oversee more than $50 billion of emerging market debt as a fund manager in Munich for Pacific Investment Management Co., which runs the world's largest bond fund. ``The market is at a complete standstill, and it's not a matter of selling but getting a price.''

Pimco owns Ukraine's euro-denominated bonds due 2015, Bloomberg data show. Falling prices pushed the yield up 2 percentage points today to 18 percent, the highest on record.

`Necessary Interventions'

The central bank spent $1 billion on supporting the currency after it fell as much as 12 percent against the dollar since the beginning of September, according to Valeriy Lytvytskyi, an adviser to Stelmakh at the central bank. The intervention reduced foreign reserves to $36.5 billion yesterday and pared the decline as the hryvnia strengthened by 6.6 percent today to 4.9987 per dollar.

Yushchenko, a former central bank governor, urged policy makers to ``do the necessary interventions'' to stabilize the currency on Oct. 8.

``The FX is going down the toilet and there's not much we can do,'' Isupov said.

National Bank of Ukraine Deputy Governor Volodymyr Krotyuk took over the management of Prominvestbank and imposed a moratorium on payments to creditors for six months, triggering credit rating downgrades yesterday.

Payment Restrictions

Prominvestbank had 27.6 billion hryvnia ($5.1 billion) of assets as of Sept. 30, according to its Web site. The Kiev-based bank was set up in 1992 and increased its net income to 360 million hryvnia in the second quarter from 196 million hryvnia in the same period a year ago, according to the Web site. The central bank gave Prominvestbank a credit line of 5 billion hryvnia last week.

Moody's Investors Service has ``concerns about the bank's ability to continue its operations as a viable stand-alone entity,'' analyst Yaroslav Sovgyra said in a report yesterday. ``Prominvestbank's franchise and the overall credit profile have been significantly impaired in light of the recently experienced run on deposits by the bank.''

Ukrainian law gives the central bank ``powers such as limiting or prohibiting the disposal of the banks' capital and assets and imposing temporary restrictions on payments to creditors,'' Moody's said.

`Distressed' CDS

The New York-based ratings company cut its foreign-currency deposit grade for Prominvestbank to Caa2, the fourth-lowest ranking, from B2.

Ukraine's banks owed $38.4 billion as of July, according to central bank data. That compares with the $61 billion owed by Iceland's three collapsed banks. National Bank of Ukraine has injected 7.795 billion hryvnia into the banking system since the beginning of October, already more than the 5.96 billion lent to banks during the whole of September.

Shares in Raiffeisen Bank Aval, Ukraine's second-biggest lender by assets, have tumbled 74 percent this year, after climbing for the previous three years. AKB Ukrsotsbank, the country's fourth-biggest bank, has slumped 79 percent.

Ukraine is the only government among Europe's emerging markets besides Kazakhstan with credit-default swaps trading above 1,000 basis points, a level investors charge for creditors perceived as ``distressed.'' Contracts on Kazakhstan jumped to 1,050 basis points from 759 basis points today as the government increased sevenfold the limit on retail bank deposits guaranteed.

Russian Risk

Contracts on Russian government debt jumped 179 basis points to 559, the highest since at least 2004, according to CMA Datavision. Credit-default swaps on Turkey rose 138 points to 552 points today, while Hungary increased 116 points to 458.

Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a country or company's ability to repay debt. They pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. An increase indicates a deterioration in the perception of credit quality.

A basis point on a credit-default swap contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.

To contact the reporter on this story: Emma O'Brien in Moscow at eobrien6@bloomberg.net; Neil Unmack in London nunmack@bloomberg.net

Last Updated: October 10, 2008 11:31 EDT