Ukrainian Yields Jump to Pre-Bailout Level on Civil-War Threat

Ukrainian bond yields jumped to a level last seen before the nation won a $15 billion bailout last month from Russia as the European Union warned that anti-government protests could escalate into a civil war.

The yield on dollar debt due in April 2023 rose 18 basis points, or 0.18 percentage point, to 9.55 percent by 6:55 p.m. in Kiev, the highest since Dec. 16, a day before Ukraine secured the rescue loan. It is up 123 basis points this week, the most on record for the period, data compiled by Bloomberg show.

EU justice chief Viviane Reding told CNBC today Ukraine must get its “house in order” as it heads in the “direction of a civil war.” President Viktor Yanukovych is struggling to end two months of demonstrations after he snubbed a cooperation deal with the EU on Nov. 21 to win financial aid from Russia.

“The confrontation can create unpredictable and largely negative consequences for the country’s economy and political integrity,” Bank of America Corp. analysts Arko Sen in London and Vladimir Osakovskiy in Moscow wrote in a report today. The “president’s readiness for concessions could endanger the continuity of the Russian bailout,” they said.

Activists yesterday took over local government headquarters in several cities as clashes this week left as many as five people dead and about 1,250 injured after the enactment of laws giving the police special powers to quell the protests.

The Bank of America analysts are “turning more cautious” toward Ukraine and they now prefer sovereign notes maturing in 2014 and 2016 over those due in 2020 and 2022, the report says.

Default Swaps

The yield on the government’s June 2014 dollar notes rose 176 basis points to 11.80 percent, taking this week’s jump to a record 6.22 percentage points. The cost of insuring Ukrainian debt with credit-default swaps rose 17 basis points to 912, up for a sixth day to the highest since Dec. 16, according to CMA.

While opposition leader Vitali Klitschko said the president still refuses to call early elections, lawmakers were yesterday recalled from their winter break for an emergency session on Jan. 28. Parliament will consider a no-confidence motion against the government and the repeal of laws curbing rallies, Svoboda party head Oleh Tyahnybok said.

The U.S. has pledged to revoke the visas of persons linked to violence last year. White House press secretary Jay Carney said yesterday that sanctions remain under consideration.

Ukraine, a key east-west energy transit nation, is still grappling with a record current-account deficit and a third recession since 2008. The hryvnia was little changed at 8.4350 per dollar, leaving it 3.1 percent weaker in the past month.

Russia bought $3 billion in two-year Ukrainian bonds on Dec. 20 and pledged another $12 billion this year, as well as cutting the price of natural-gas supplies to Ukraine.

“There is clear concern as to whether the loans will continue to be disbursed and what conditions are going to be attached to the disbursements by Russia,” Simon Quijano-Evans, London-based head of emerging-market research at Commerzbank AG, said by e-mail today.

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