Ukraine’s Cash Shortage Eases as Interbank Rates Plunge to 11.5%

Ukrainian interbank rates tumbled for a second day after reaching a one-year high in a sign that financial markets are normalizing even as clashes between police and anti-government protesters escalated.

The rate at which Ukrainian banks lend overnight to each other fell to 11.5 percent from 17 percent yesterday and a 2013-high of 20 percent on Dec. 9, according to National Foreign Exchange Association data. The yield on the nation’s dollar bonds due in June 2014 fell to 20.1 percent at 9:26 p.m. in Kiev, a 58 basis-point decline from yesterday’s record high.

Liquidity among Ukrainian lenders tightened this month as central bank interventions to prop up the hryvnia during the street protests drained the local currency from the financial system. While overnight rates are still more than two times higher than the average for November, the situation is improving without “evidence” of central bank cash injections, said Vladislav Sochinsky, a treasurer at Citigroup Inc. in Kiev.

“Investors are now anticipating that the protests are likely to lose momentum as we approach the end of the year,” Regis Chatellier, a London-based strategist at Societe Generale SA, said in e-mailed response to questions.

Dozens were injured today after authorities moved in to dismantle a camp in Kiev’s Independence Square where people have protested since Ukraine suspended trade talks with the European Union on Nov. 21 to pursue closer ties with Russia instead.

Bond Inflows

After pulling money out of the country in October and November, investors have returned this month, with Ukrainian bond funds receiving inflows of $10.06 million through Dec. 9, according to EPFR Global.

Ukraine may have as little as three months to gain international financing as its foreign-currency reserves plummet, Ivan Tchakarov, chief economist at Citigroup in Moscow, said by phone yesterday. The nation’s reserves dropped 9 percent last month to $18.8 billion and are down 51 percent since mid-2011, central bank data published on Dec. 6 show.

The hryvnia weakened 0.2 percent to 8.2675 against the dollar today after dropping 0.9 percent yesterday. The yield on Ukraine’s dollar bonds due April 2023 fell 20 basis points to 10.46 percent, after touching a record 10.8 percent Dec. 9, according to data compiled by Bloomberg.

“It seems merely a matter of time before the Ukrainian central bank gives in, allowing the local currency to depreciate” as it “is running out of reserves,” Thu Lan Nguyen, a currency strategist at Commerzbank AG in Frankfurt, said in an e-mail.

Not ‘Stabilized’

Ukraine wants 20 billion euros ($28 billion) of financing from the EU, Prime Minister Mykola Azarov said at a government meeting in Kiev today. Yesterday, President Viktor Yanukovych vowed to restart financing talks with the IMF and promised to sign an EU trade deal in March.

The cost of insuring Ukrainian dollar bonds against non-payment for five years through credit-default swaps dropped 38 basis points, or 0.38 percentage point, to 10.84 percent, according to CMA data. The contracts set a four-year high at 11.41 percent on Dec. 9, the data show.

Yanukovych may now be moving toward a financing package which would “considerably” reduce the risk of default, SocGen’s Chatellier said.

“It doesn’t mean that politically the situation will be fully stabilized yet,” he said.

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