Ukraine Credit Rating Cut at S&P as Political Turmoil Escalates

Ukraine’s foreign-currency credit rating was cut by Standard & Poor’s, which said that an escalation of political turmoil undermined the country’s ability to service its debt and threatened aid from Russia.

S&P lowered its assessment of Ukraine’s debt one step to CCC+, the seventh-lowest junk rating, according to a statement today from London. It assigned a negative outlook, indicating the rating may be cut further into junk territory. The company affirmed Ukraine’s long-term local-currency grade at B-.

In almost half the instances, yields on government bonds fall when a rating action by Moody’s Investor Service and S&P suggests they should climb, according to data compiled by Bloomberg on 314 upgrades, downgrades and outlook changes going back as far as the 1970s. When S&P downgraded the U.S. government in August 2011, bonds rose and pushed Treasury yields down to records.

“We now assess Ukraine under our criteria as exhibiting characteristics of a ‘distressed civil society with weakened political institutions,’ diminishing the government’s capacity to maintain timely debt service,” S&P said in the statement. The turmoil “makes the expected financial support package from Russia less certain should the government of President Yanukovych fall.”

President Viktor Yanukovych is struggling to contain unrest that’s spread from Kiev to other cities across the nation of 45 million people, a key transit route for Russian energy supplies to Europe. Prime Minister Mykola Azarov quit today to help end more than two months of street protests after lawmakers revoked anti-rally laws that sparked deadly riots last week.

Russian Bailout

In the wake of Azarov’s resignation, the yield on the government’s dollar-denominated notes due in June fell 2.8 percentage points to 9:95 percent at 7:50 p.m. in Kiev.

President Vladimir Putin told reporters following a meeting with European Union leaders today that Russia will go ahead with a $15 billion bailout for Ukraine even if the opposition comes to power, as long as the new government pursues economic policies the two sides agreed on.

S&P said the rescue package was in jeopardy.

If Yanukovych “loses power, either by being forced from office or by early presidential elections being called, and if diplomatic relations with Russia deteriorated, we believe the $15 billion in direct financing to the Ukrainian government from Russia could be put at risk,” it said.

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