Ukraine Bonds Sink as Risk of War in East Stokes Default Concern

Ukrainian bonds slumped the most since March as the threat of open war in the nation’s east deepened concern the government will struggle to repay debt.

The yield on Ukraine’s $2.6 billion of bonds due July 2017 soared 154 basis points to a record 17.67 percent at 7:14 p.m. in Kiev, bringing the eight-day increase to 428 basis points, or 4.28 percentage points. The hryvnia, which is down 18 percent this month in the world’s largest decline, was unchanged at 15.85 per dollar. Ukrainian shares slid for a fifth day.

The threat that a two-month-old cease-fire in Ukraine will unravel grew today as NATO accused Russia of sending troops and heavy weapons into its neighbor. As the nation suffers from its second recession in five years, the return to war raises the likelihood Ukraine will struggle to pay back debt, according to Standard Bank Group Ltd. The government has $14.63 billion of principal and interest payments due by the end of 2015, according to data compiled by Bloomberg.

“Investors are voting with their feet, they now expect further Russian military intervention and expect the West to do nothing to help Ukraine,” Timothy Ash, London-based chief economist for emerging markets at Standard Bank, said by e-mail today. Bondholders are increasingly concerned that a war could trigger a “collapse” of state, leaving the country unable to pay its debt, he said.

The separatists and their Russian backers are amassing troops in the areas of the Donetsk and Luhansk regions they’ve seized, Ukrainian Defense Minister Stepan Poltorak told a government meeting in Kiev earlier today. Russia’s Defense Ministry denied its involvement, state-run RIA Novosti reported.

Renewed Conflict

Pressure has been building for days, with the government and rebels accusing each other of gearing up for a renewed military push that risks swelling a death toll exceeding 4,000. The UX Index dropped 1.5 percent to the lowest level since Feb. 21 today. The hryvnia has weakened 48 percent against the dollar this year.

The International Monetary Fund has warned that a $17 billion bailout may not be enough to keep the former Soviet republic of 43 million people afloat. The conflict will deepen the recession, deplete foreign-currency reserves and weaken the hryvnia, JPMorgan Chase & Co. said in a report yesterday.

“Only an outright war could push the country closer to a disorderly default, which is not my main scenario,” Lutz Roehmeyer, a money manager overseeing $1.1 billion of emerging-market debt at LBB Invest in Berlin, said by e-mail.

Reserves Slide

The National Bank of Ukraine scrapped its target exchange rate of 12.95 per dollar on Nov. 4 after interventions to prop up the hryvnia cut its foreign reserves to $12.6 billion in October, the lowest in more than nine years. A more flexible hryvnia rate is one of the conditions of the IMF for keeping the country afloat with bailout loans. A mission from the Washington-based fund is visiting this month.

The risks to Ukraine’s economy are set to mount as the country’s cash pile will shrink to $7.4 billion by year-end and $5.4 billion by December 2015, JPMorgan economist Nicolaie Alexandru-Chidesciuc in London said in yesterday’s report.

The hryvnia will slump to 16.5 per dollar by Dec. 31 and to 18 per dollar at the end of next year, JPMorgan said. The economy is poised to shrink 6.9 percent this year, according to the median estimate of 17 analysts in a Bloomberg survey.

“It is all nerve-wracking,” Roehmeyer said. “Investors will think about Russia and Ukraine worse and worse the longer this situation continues.”

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