Kiev Chaos Jumps Borders as Markets Teeter: East Europe Credit

Markets from Hungary to Poland and Russia are suffering contagion from the violence rocking Ukraine’s capital, sending bond yields higher and currencies lower as the turbulence afflicting developing nations deepens.

Hungary’s forint weakened for a third day today, while Russia’s ruble rebounded from an all-time low. The yield on Poland’s 10-year bond was little changed after climbing the most in a week. Ukraine’s debt due in June gained, sending the rate to 33 percent at 12:44 p.m. in Kiev after it jumped 19 percentage points to a record 42 percent yesterday.

While European officials called for sanctions against Ukraine’s government after the bloodiest clashes in a three-month standoff with activists in Kiev’s Independence Square, investors recoiling from the mayhem sold assets across the region as the conflict spread in the nation. Russia canceled a bond auction for the third time in less than a month as the ruble slid and yields climbed.

“We are already seeing spillover from Ukraine to Russia and Poland in currencies and bonds,” Richard Segal, a strategist at Jefferies International Ltd. in London, said by e-mail yesterday. “If Ukraine truly collapses, Russia could feel forced to pick up the pieces, which would be expensive.”

‘Civil War’

Ukraine may be on the verge of “civil war,” Polish Prime Minister Donald Tusk said yesterday. At least 26 people died in clashes between protesters and security forces of Russia-backed President Viktor Yanukovych. European Union foreign ministers were scheduled to meet today to weigh “all possible options,” including “restrictive measures against those responsible for repression,” the bloc’s foreign policy chief, Catherine Ashton, said in an e-mailed statement yesterday.

“I don’t expect to see any political unrest that is remotely of the same nature of Ukraine’s in the other central and eastern European countries,” Abbas Ameli-Renani, a London-based strategist at Royal Bank of Scotland Group Plc, wrote by e-mail yesterday. “But the situation just brings attention back on to emerging markets.”

Lawmakers in Ukraine’s Lviv region said they’ll no longer take orders from the Yanukovych administration, which snubbed an EU cooperation deal last year in favor of a bailout from the Kremlin. Protesters seized government or security service headquarters in at least four other regions in the country of 45 million, a key route for Russian gas.

Templeton Holdings

Ukraine’s government and opposition agreed on a temporary truce and will continue talks to stop the bloodshed, Yanukovych said on his website late yesterday. Today he accused opposition leaders of using the truce for renewed attacks on security forces, according to a statement on his website.

The U.S. versions of Franklin Resources Inc.’s Templeton Global Bond Fund and the Templeton Global Total Return Fund, overseen by Michael Hasenstab, increased holdings of Ukrainian international dollar debt by $252 million in face value to about $3.8 billion, according to data compiled by Bloomberg through Dec. 31. Franklin’s fourth-quarter increase adds to the $1.4 billion bet on Ukraine the asset manager made in third quarter, Bloomberg data show.

Hryvnia, Zloty

The Ukrainian Equities Index fell for a third day today, losing 2.7 percent and the hryvnia weakened 1.2 percent to 9.06 per dollar. Russia’s ruble, which yesterday lost 0.7 percent to a record 41.7826 against Bank Rossii’s target basket of dollars and euros, rebounded to 41.7294 today.

Poland’s currency weakened 0.2 percent against the euro today in a fourth day of losses, and the yield on its 10-year zloty bond slipped less than one basis point to 4.52 percent.

“Poland is seen as an economically very solid credit,” so the effect on its Eurobonds from Ukraine will be minimal, Sergey Dergachev, who helps oversee about $9 billion as senior money manager at Union Investment Privatfonds GmbH in Frankfurt, said by e-mail yesterday.

The forint weakened 0.2 percent against the euro after losing 1 percent yesterday. OTP Bank Nyrt., Hungary’s largest lender, slid to a seven-week low after it closed six of its 140 branches in Ukraine. The bank said the risk of hryvnia depreciation is “predictable and managed,” according to an e-mailed statement yesterday.

‘Limited’ Risks

Risks for emerging European markets are “limited” as it’s in the interest of both Russia and the West to keep Ukraine afloat, said Michael Ganske, head of emerging markets at Rogge Global Partners Plc in London, who helps oversee $8.5 billion of assets, including some Ukrainian bonds.

“Ukraine has high geopolitical relevance, but this is exactly the backstop from a credit perspective as none of the players wants the country to default and would step in to avoid that,” Ganske said by e-mail yesterday.

Russia said this week it would resume its $15 billion aid program, with plans to purchase $2 billion of Ukrainian Eurobonds on top of $3 billion it bought in December.

Ukraine is grappling with a record current-account deficit and foreign reserves at the lowest level since 2006. The government has a $1 billion bond coming due June 4, according to data compiled by Bloomberg.

“The situation is already clear for Russia, which is why Russia is providing large loans to Ukraine, but we then have to start thinking further about what implications this has for trade and business out of the EU as a whole,” Simon Quijano-Evans, the head of emerging-market research at Commerzbank AG in London, said by e-mail yesterday. “If the EU and Russia fail to sit at a table and discuss Ukraine in a constructive manner, we are going to start seeing negative fallout effects in countries neighboring Ukraine.”

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