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Goldman Sticks to Ukraine Currency Rout Call: East Europe Credit

Ukraine's Hryvnia Currency
The hryvnia weakened 3.1 percent to 9.4575 per dollar by 10:57 a.m. in Kiev, extending this year’s depreciation to 13 percent, the most among currencies tracked by Bloomberg after the Argentine peso and the Kazakh tenge. Photographer: Vincent Mundy/Bloomberg

Feb. 25 (Bloomberg) -- As Ukraine investors greeted the ouster of President Viktor Yanukovych with the biggest bond rally this year, calls by interim leaders for as much as $35 billion in aid are weighing on the currency.

The yield on Ukraine’s dollar bonds due in 2023 dropped 93 basis points yesterday to a four-week low of 9.26 percent, the biggest decline since Dec. 17, before rising 12 basis points today. The hryvnia weakened 6.4 percent to 9.8 per dollar at 2:57 p.m. in Kiev, data compiled by Bloomberg show. That extended this year’s decline to 16 percent, the most among currencies tracked by Bloomberg after the Argentine peso and the Kazakh tenge.

The International Monetary Fund, the U.S. and the European Union said they were prepared to help Ukraine, fueling bond gains even as interim President Oleksandr Turchynov said the economy was “spinning out of control” in a “pre-default situation.” Goldman Sachs Group Inc. predicted the change of government would do little to slow capital outflows and stem the loss of foreign reserves, affirming its forecast for the hrvynia to plunge to a record 12 per dollar.

“I’d take this moment of calm to try to hedge up or protect your current positions rather than rush in and speculate that everything is going to be fine,” Mark Grant, managing director at Southwest Securities Inc. in Fort Lauderdale, Florida, said in a phone interview yesterday.

Avoiding Default

The eastern European country needs $35 billion of aid to avoid default and will seek to win a foreign loan within two weeks, acting Finance Minister Yuriy Kolobov said yesterday.

Ukraine, which is grappling with a record current-account deficit and recovering from its third recession since 2008, has seen its foreign reserves plunge 28 percent in the past year to $17.8 billion on Jan. 31, the lowest since 2006. The junk-rated sovereign has more than $16 billion of liabilities, excluding interest, coming due this and next year, with $1 billion in bonds maturing in June, according to data compiled by Bloomberg.

The sovereign’s reserves, which have been spent to prop up the hryvnia, will drop to as little as $12 billion this month, analysts at Goldman Sachs including Andrew Matheny in Moscow, wrote in an e-mailed report yesterday. Goldman Sachs predicted outflows from hryvnia bank deposits accelerating in a Feb. 7 note, which forecast the currency dropping to 12 per dollar in three months, as dwindling reserves stir “risk of further capital outflows.”

Venezuela Spread

Bond markets rallied yesterday as the interim government in Kiev issued an arrest warrant for Yanukovych, for his role in violence that killed at least 82 people this month amid the biggest anti-government protests since the country gained independence in 1991. The Ukrainian Equities Index fell 1.8 percent today, after jumping 23 percent in the previous three trading sessions.

The extra yield demanded by investors to hold Ukraine’s April 2023 dollar notes over similar-maturity Venezuelan securities was 664 basis points today, up from last week’s low of 575, data compiled by Bloomberg show. The rate on Ukraine dollar bonds due in June, which dropped 402 basis points, or 4.02 percentage points, to 20.62 percent yesterday, rose 3.89 percentage points today as the price dropped to 95.74 cents on the dollar.

Yanukovych fled Kiev last week after lawmakers removed him from power following an EU-brokered peace agreement that halted deadly street clashes. Turchynov delayed a parliamentary vote on a national unity government to Feb. 27 from today as he attempts to win agreement with protest leaders who orchestrated the revolt.

While a new government needs to be established before Ukraine can receive aid, the first payments may arrive next week, Elmar Brok, the head of the European Parliament’s foreign affairs committee, said in Kiev yesterday.

IMF Support

Ukraine needs to renew its IMF program immediately as it lacks funds for debt repayments, Arseniy Yatsenyuk, the leader of former Premier Yulia Tymoshenko’s party, said yesterday. The Washington-based lender is ready to help Ukraine “not only from a humanitarian point of view but also from an economic point of view,” Managing Director Christine Lagarde told reporters in Sydney on Feb. 23 following a meeting of Group of 20 officials.

Last week’s selloff was a good opportunity to buy Ukraine’s bonds as the former Soviet republic will have enough funds to pay debt due in June and there is pressure on Western donors to provide aid, Hans Humes, chief executive officer of Greylock Capital Management LLC, said on Bloomberg TV yesterday.

Potential western aid donors including the IMF would probably ask the central bank in Kiev to stop intervening in support of the domestic currency, Tatiana Orlova, London-based senior economist at Royal Bank of Scotland Group Plc, wrote in an e-mailed report yesterday.

Russian Questions

“Even if Ukraine manages to secure fresh international aid in the coming weeks and months, further devaluation is likely from the current level,” Orlova wrote. “The hryvnia could weaken further to 11-12 versus the dollar by end-2014, and we cannot exclude an even sharper devaluation.”

The hryvnia will weaken “toward its fair value of 10” per dollar, analysts at Citigroup Inc. including Ivan Tchakarov in Moscow, wrote in an e-mailed report yesterday.

Ukraine is turning to other sources for financial assistance after Russia suspended its $15 billion aid program last month following the resignation of Premier Mykola Azarov.

Russia will honor all of its agreements with its neighbor, including an accord for cut-price gas shipments that Yanukovych signed in December, Russian Prime Minister Dmitry Medvedev said, according to comments posted on a government website. Even so, the premier said he had questions about the legitimacy of many Ukrainian state institutions and warned that his country’s interests are under threat.

“The market positivity seems overdone,” Dmitri Petrov and Peter Attard Montalto, London-based strategists at Nomura Holdings Inc., wrote in an e-mailed report yesterday. “While external funding sources are mobilizing, the ability to agree to conditionality and form a stable administration remain problematic.”

To contact the reporter on this story: Andras Gergely in Budapest at

To contact the editor responsible for this story: Wojciech Moskwa at

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