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Ukrainian Bonds Drop to Week-Low as Rebels Spur Secession Bets

May 13 (Bloomberg) -- Ukraine’s Eurobonds declined, sending yields to a week-high, and the hryvnia fell as separatists demanding independence in eastern regions stoked bets the country will move toward a decentralized government.

The yield on dollar notes due April 2023 rose three basis points to 10.36 percent, after jumping 1.23 percentage points in 2014. The currency weakened 0.1 percent to 11.8 per dollar by 5:18 p.m. in Kiev, taking this year’s retreat to 30 percent, the most among more than 170 peers monitored by Bloomberg.

Ukraine’s debt extended losses as the self-styled Donetsk People’s Republic on the border with Russia declared itself a sovereign state yesterday and separatists in neighboring Luhansk announced a similar move. With the Black Sea region of Crimea already in Russian hands, Ukraine risks losing a fifth of its gross domestic product, which may preserve just enough to keep an international bailout program running, according to Bank of America Corp.

“In our base case, Russia is likely to succeed in forcing Ukraine into deep constitutional reform, which could shift more authority to regional powers,” Vadim Khramov, a London-based analyst at the bank, wrote in an e-mailed report today. The International Monetary Fund “program is likely to continue without substantial changes,” he said.

The Ukrainian Equities Index fell 3.2 percent to 1,052.63, the lowest since March 31, as Defense Minister Mykhaylo Koval said the country is fighting an “undeclared war” with Russia.

The “economic separation” of Kharkiv, another one of Ukraine’s main industrial regions, would take the total loss of output to 25 percent, forcing the IMF to redesign its aid plan, Bank of America’s Khramov wrote. That “unlikely” scenario would probably trigger a further devaluation of the hryvnia and may make debt repayments unsustainable, he said.

The “worst-case” option of Ukraine losing eight southeastern regions would lead to a default, according to Bank of America.

“In this scenario, debt dynamics would become unsustainable,” the lender said. “The IMF likely would demand external and local debt restructuring with sizable ‘haircuts’ to bond values.”

To contact the reporter on this story: Andras Gergely in Budapest at agergely@bloomberg.net

To contact the editors responsible for this story: Wojciech Moskwa at wmoskwa@bloomberg.net Ash Kumar, Zahra Hankir

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