Ukraine CDS Jump to Three-Year High After Moody’s Downgrade

The cost of insuring Ukrainian debt against default surged to a three-year high after Moody’s Investors Service cut the country’s credit rating deeper into junk last week, citing “very high default risk.”

The cost of Ukrainian credit-default swaps jumped for a third day, increasing 103 basis points to 1,041 at 5:30 p.m. in Kiev, the highest since January 2010, according to data compiled by Bloomberg. The yield on the country’s dollar bonds due in 2023 rose to a one-week high of 10.06 percent today.

Moody’s downgraded Ukrainian debt on Sept. 20 by one level to Caa1, seven steps below investment grade, amid growing political and economic risks and a lack of prospects for a bailout from the International Monetary Fund. Ukraine is struggling with economic contraction, a widening current-account deficit, shirking foreign-currency reserves and trade restrictions from Russia, its biggest export market.

“Moody’s downgrade served as a wake up call on Ukraine,” said Luis Costa, an emerging-market strategist at Citigroup Inc. in London. “All in all, we are looking into a scenario under which Ukraine depends even more from Russian capital flows, and some borrowing in the external markets.”

The government, which is poised to pursue closer links with the European Union instead of joining a Russia-led trading bloc, has failed to agree on a new IMF bailout because of disagreements over energy subsidies.

Declining Reserves

Ukraine’s central bank reserves slid to $21.65 billion on Aug. 31, or less than three months of imports, dipping below a threshold some economists use to gauge financial stability.

The country’s 2023 dollar notes have lost 12 percent since they were sold in April, compared with a 6.3 percent decline in the Bloomberg Emerging Markets Sovereign Bond Index. The hryvnia weakened 0.3 percent to 8.1850 per dollar today.

Moody’s cited “increased political and economic risks due to deteriorating relations with Russia,” low central bank reserves and “increased downside risk related to future negotiations” with the IMF in its statement on Sept. 20.

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