Ukraine Rally on Talks Seen Fleeting: East Europe Credit

Ukraine’s bonds risk resuming the world’s third-biggest slump this quarter even as the government said it agreed on steps with Russia toward a cease-fire with separatist rebels.

The yield on Ukraine’s July 2017 dollar notes fell 90 basis points today, paring a 382 basis-point jump since Aug. 19 to a three-month high, after Ukrainian President Petro Poroshenko said he agreed with his Russian counterpart Vladimir Putin on a roadmap to achieve truce in Ukraine’s easternmost regions. Aberdeen Asset Management Plc and Erste Sparinvest KAG said today it was too early to justify buying.

The bonds slid the most after Argentina and Venezuela among emerging markets in the third quarter as the armed conflict escalated, deepening the economic woes of a country reliant on an International Monetary Fund bailout to repay its debt. The securities surged today as President Putin’s spokesman said he supported the idea of an immediate truce.

“It is too early” to buy Ukraine notes, Anton Hauser, who helps manage the equivalent of $2.4 billion in assets at Erste in Vienna, wrote by e-mail today. “We will wait until the dust settles and the cease-fire will really be kept.”

The country’s debt lost 8.1 percent since June through yesterday, while the Bloomberg USD Emerging Market Sovereign Bond Index rose 0.8 percent.

Rebel Agreement?

The U.S. and the European Union accuse Putin of arming separatists in Ukraine, a claim Russia denies. A lasting cease-fire would be the biggest breakthrough yet in the conflict that the United Nations estimates has cost at least 2,600 lives. Pro-Russian rebels said Poroshenko didn’t agree to a cease-fire with them, RIA Novosti reported.

Russia may have signaled its readiness for peace just to avert further sanctions, which means the conflict will probably escalate again once a NATO summit this week is over, Viktor Szabo, who helps manage more than $13 billion in emerging-market debt at Aberdeen.

“The fundamental problem has not changed, Moscow wants to keep its influence over certain territories in eastern Ukraine,” Szabo said. “If Ukraine agrees to that, it will become even more vulnerable economically. And Moscow won’t yield from that.”

Ukraine has more than $17 billion of principal and interest payments coming due through the end of 2015, according to data compiled by Bloomberg. The IMF, which has pledged loans worth the same amount, said in a report on its website yesterday that the country may need an additional $19 billion by the end of next year, in a scenario of prolonged armed conflict.

‘Concrete Evidence’

“The markets reacted optimistically to the news, however, I would urge caution until we see concrete evidence of a cease-fire holding,” Tatiana Orlova, a London-based economist at Royal Bank of Scotland Group Plc, said by e-mail.

The yield on Ukrainian dollar bonds due in April 2023 traded at 10.1 percent today, a 254 basis-point discount versus the 2017 debt, compared 305 yesterday, the widest since May. Investors are weighing Ukraine’s funding crunch as its economy faces a contraction of as much as 7.3 percent this year and 4.2 percent in 2015, IMF forecasts show.

The slump in Ukraine’s bonds may be limited by the prospect of more financial aid from its allies, Regis Chatellier, a London-based strategist at Societe Generale SA, said by e-mail yesterday.

Hryvnia Rebounds

“Ukraine is strategic enough for the U.S. and EU to make sure that” they provide support, he said.

Ukraine’s foreign-debt burden worsened as the hryvnia depreciated 34 percent this year against the dollar, the worst after Ghana’s cedi among currencies tracked by Bloomberg. The central bank has been selling dollars in the market and curbing access to foreign currencies to slow the weakening, helping the hryvnia rebound almost 10 percent in the past week.

The slump in Ukraine’s assets may resume, RBS’s Orlova said.

“I wouldn’t be surprised,” Orlova said. “Ukraine has so far refused to have official talks with the rebels. Who is going to sign the permanent truce?”

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