Ukraine Bonds Rally as Factions Sign Peace Pact to End Crisis

Ukrainian bonds jumped the most since Russia’s bailout pledge two months ago as President Viktor Yanukovych and opposition leaders agreed on early presidential elections and lawmakers changed the constitution.

The yield on government bonds maturing in April 2023 dropped 90 basis points, the biggest retreat since Dec. 17, to 10.2 percent by 6:23 p.m. in Kiev. The equities index jumped 3.2 percent, taking its two-day gain to 7.2 percent. Currencies across developing Europe rallied, reversing losses after deadly clashes in Ukraine this week sparked a rout in regional assets.

The European Union-brokered peace deal between the government and opposition envisages snap presidential elections by December and a national unity government within 10 days. Lawmakers backed a return to the 2004 constitution, a step that would curb Yanukovych’s powers. The accord “offers a real chance to end the bloodshed,” U.K. Prime Minister David Cameron said. At least 77 protestors and police were killed this week, the most since the standoff began in November.

The deal “offers hope that further violence may be avoided,” Alina Slyusarchuk, a London-based economist at Morgan Stanley, wrote in an e-mailed report. A “sharp” depreciation in the currency, pressure on bank deposits and restructuring of external debt are among the risks that remain unless the accord is followed by “prompt implementation of a consistent policy,” according to Morgan Stanley.

Hryvnia’s Plunge

The hryvnia has plunged almost 8 percent versus the dollar this year, data compiled by Bloomberg show, as the central bank scaled back its support. Policy makers may be wasting foreign reserves to defend the currency as “there will be depreciation anyway,” Russian Finance Minister Anton Siluanov said in an interview in Hong Kong today.

Ukraine’s political crisis has raised “many questions” about its ability to repay debt, pushing Russia to suspend a bailout and threatening the central bank’s ability to defend the currency, Siluanov said.

OAO Sberbank, Russia’s largest bank, halted retail lending in Ukraine, as the lender witnessed a run on its automated teller machines in the protest-hit nation, Herman Gref, the chief executive officer, told reporters in Moscow today.

The pact between Ukraine’s government and protestors was brokered in all-night talks in Kiev with three EU foreign ministers. Speaking by phone, Oleksiy Haran, a member of the demonstrators’ Maidan Council, emphasized the constitutional change and new government as “the key victory.” Lawmakers also voted to free jailed ex-Prime Minister Yulia Tymoshenko. Even so, opposition leader Arseniy Yatsenyuk, who heads the former premier’s party, pointed to further tensions.

S&P Cut

Protesters will remain at the Independence Square camp they built in November, according to Yatsenyuk, who said Yanukovych would be given no assurances on his fate. The nationalist Pravy Sektor movement pledged to continue “national revolution” as the peace deal falls short of demands to remove Yanukovych’s regime, according to a statement on social website Vkontakte.

Standard & Poor’s cut Ukraine’s credit rating to CCC, eight levels below investment grade, saying the country risks default without “significantly favorable changes.” Ukraine, which is grappling with a record current-account deficit, has seen its foreign reserves plunge 28 percent in the past year to $17.8 billion at the end of January, the lowest level since 2006.

The country has $17 billion of liabilities coming due, excluding interest, through the end of 2015, including the $1 billion due in June this year, data compiled by Bloomberg show. The price on notes maturing in four months climbed to 95.63 cents on the dollar from 93.13 cents yesterday.

Forint Gains

Hungary’s forint strengthened 0.4 percent against the euro. Russia’s ruble, which dropped to a record on Feb. 19, climbed 0.5 percent against the central bank’s target dual-currency basket, while Turkey’s lira jumped 0.8 percent versus the dollar to erase a weekly loss.

“We now believe it is likely that Ukraine will default in the absence of significantly favorable changes in circumstances, which we do not anticipate,” S&P analysts said in a statement today. “The Russian government’s support for Ukraine is tied to the current leadership and its political orientation away from the EU and toward Russia.”

In almost half the instances, yields on government bonds fall when a rating action by Moody’s Investors 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 to record lows.

Wealth Fund

The standoff in Ukraine started in November when the president backed out of a free trade deal with the EU, opting instead for closer ties with Russia, which pledged $15 billion of loans and cheaper natural gas in a bailout the following month.

Russia’s sovereign wealth fund invested the first $3 billion of the bailout in Ukrainian two-year notes in December. Ukraine scrapped a planned $2 billion bond sale this week, according to a statement Feb. 20 to the Irish Stock Exchange, where the notes used in the bailout program are listed.

The hryvnia may weaken to 10 per dollar next year with a risk of a “significant” overshoot in the coming months, Anna Zadornova, a London-based economist at UBS AG, wrote in an e-mailed report today. “The longer the political turmoil persists, the higher the risk that the worst-case scenario of a full-blown balance of payments and sovereign debt crisis materializes.”

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