Ukraine Credit Rating Cut by S&P on Debt Repayments

Ukraine’s credit rating was cut by Standard & Poor’s, which cited “significant external financing needs,” while the country’s reserves slid.

The former Soviet state’s debt was lowered one level to B, five steps below investment grade, S&P said in an e-mailed statement today. The rating has a negative outlook, suggesting the possibility of a further downgrade from the current level, which is on par with Egypt and Bosnia. Moody’s Investors Service this week cut its rating one step to B3, six levels below investment grade.

Ukraine, which neighbors Russia to its east, is seeking IMF aid to meet $10 billion of debt payments due in 2013 and help stabilize an economy that shrank 1.3 percent from a year earlier in the third quarter. President Viktor Yanukovych dismissed the Cabinet on Dec. 3 after Prime Minister Mykola Azarov stepped down following his election to Parliament. The government remains on a temporary basis.

“The government may face higher borrowing costs and more difficulty securing financing than it has over the past year,” S&P said. “A sharp and sustained decline in net foreign currency reserves would put downward pressure on the ratings.”

Ukraine’s 2022 government bond fell for a third day, pushing the yield up to 7.799 percent from 7.719 yesterday. The hryvnia strengthened to 8.1637 as of 17:01 p.m. in Kiev from 8.1794 yesterday.

Reserves Shrink

Ukraine’s central bank reserves fell 5.5 percent to 25.4 billion in November, the lowest since March 2010, as the central bank helped hryvnia to stay stable.

The International Monetary Fund planned to arrive in Kiev today for talks on a third bailout in five years at the former Soviet republic’s request. It delayed its visit to the second half of January, allowing a new Cabinet to participate after Azarov resigned.

“There’s a lot of debt they have to repay next year and there’s a lot of pressure on the hryvnia,” Liza Ermolenko, an emerging-markets economist at Capital Economics Ltd. in London, said by phone. “Investors are getting nervous and people want to see some movement from the government toward an IMF deal. They don’t have a lot of options and this downgrade is another reminder for them.”

Bond Reaction

Almost half the time, government bond yields fall when a rating action suggests they should climb, or they increase even as a change signals a decline, according to data compiled by Bloomberg on 314 upgrades, downgrades and outlook changes going back as far as 38 years. The rates moved in the opposite direction 47 percent of the time for Moody’s and for S&P. The data measured yields after a month relative to U.S. Treasury debt, the global benchmark.

Fitch’s current rating and stable outlook “assume” the government will seek the deal with IMF “in a timely fashion,” Charles Seville, director of the rating company’s sovereign group in London, said by e-mail yesterday.

“The government has a window to take the necessary measures and the Cabinet reshuffle signals they are preparing the ground for this,” Seville said. A further decline in foreign reserves due to a delayed IMF agreement “is the most likely source of pressure on the rating,” he said, adding that “we’re watching that closely.”

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