Ukraine seeks to calm fears of sovereign default

13:34, 26 November 2009
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Ukraine sought...

Ukraine sought to calm foreign investors` fears of a sovereign default after European markets wobbled last week on the consequences of the restructuring of a syndicated loan by the state railway firm, according to Reuters. Investors have feared a state default throughout the year as the ex-Soviet state plunged deep into recession and most recently as the International Monetary Fund suspended its $16.4 billion bailout programme.

Acting Finance Minister Ihor Umansky said on Wednesday there was no risk of a cross-default on a $440 million loan that Ukrzaliznytsya was renegotiating, including no impact on a state-guaranteed $700 million credit from Deutsche Bank (DBKGn.DE).

He also said the government would make timely payments of its Eurobond coupons in December -- underscoring a comment from Moody`s credit rating agency late on Tuesday that despite corporate defaults, Ukraine has not shown any intention of defaulting on a sovereign debt.

Ukrzaliznytsya`s technical default came hot on the heels of a huge restructuring by state energy firm Naftogaz, at the centre of energy rows with Russia. Naftogaz swapped its foreign debt for a 5-year $1.595 billion Eurobond issued on Nov. 5.

European stocks and currencies fell for a while last Friday as investors mulled whether Ukrzaliznytsya`s syndicated loan had cross-default clauses to other loans that had state guarantees.

"The loans from Deutsche Bank and the EBRD (European Bank for Reconstruction and Development) are not being restructured and this has not been proposed," Acting Finance Minister Ihor Umansky told Reuters.

"Unfortunately information is spreading now that there is a risk of a cross-default with the state guaranteed Deutsche Bank credit. That is not true," he said.

The state railway firm failed to repay $110 million of the $440 million left of a syndicated loan earlier this month, whose full worth was $550 million.

INTENTION TO PAY

Ukraine`s economy, one Europe`s worst performing, is expected to shrink by up to 15 percent this year after steel and chemical exports slumped. The currency lost over 60 percent of its value in a year, which in turn shook the banking system.

State coffers have been stretched by not just falling incomes, but by heavy spending to support Naftogaz as it buys increasingly expensive gas it is forced to sell to domestic consumers at heavily subsidised prices.

Naftogaz` woes have led to rows with Russia and its gas export giant Gazprom (GAZP.MM) which in January caused a three-week stand-off and supply cuts to Ukraine and Europe.

Gazprom allayed fears late on Tuesday that a repeat "gas war" could be on the cards this winter by allowing Naftogaz to purchase far less gas next year -- in line with Ukraine`s needs -- than had been contracted.

Moody`s says the government`s lack of support for Naftogaz` and Ukrzaliznytsya`s credit repayments -- neither of which had an explicit government guarantee -- means it would prefer to save reserves for its own sovereign repayments.

"While there have been defaults by quasi-sovereign corporations such as Ukrzaliznytsya and Naftogaz, to date the sovereign has not shown any weakening in its intention to pay its own debts," Moody`s analyst Jonathan Schiffer said.

Umansky said there was "no doubt" that the state railway will be repaying its Deutsche Bank loan -- which is guaranteed -- and that the next payment was $33 million in January.

"Without doubt, (sovereign) Eurobond coupons due in December will be paid on time," he added.

Reuters

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