Ukraine ratings cut to CCC+ by S&P

14:38, 25 February 2009
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On IMF loan risk

Ukraine’s credit rating was cut two levels by Standard & Poor’s, a day after Latvia was downgraded to junk, because political turmoil poses growing risks to the country’s International Monetary Fund loan, Bloomberg reported.

The long-term foreign currency rating was lowered to CCC+, seven levels below investment grade, the rating company said in an e-mailed statement. Ukraine’s rating is now the lowest in Europe and on a par with Pakistan. S&P left Ukraine’s outlook negative, indicating it may reduce the ratings further.

Ukraine turned to the International Monetary Fund for a $16.4 billion loan in November after its financial system and markets were battered by the global financial crisis and economic downturn. The country’s ability to meet IMF terms by cutting spending has been hampered by the battle between President Viktor Yushchenko and Prime Minister Yulia Timoshenko, who planned a 5 percent budget deficit this year, the president’s office claims.

“The downgrades reflect intensifying execution risks associated with Ukraine’s arrangement with the IMF, due to the absence of broad political backing for necessary budgetary revisions and banking system reform ahead of the January 2010 presidential elections,” S&P said in the statement.

Contracts to protect Ukraine’s government bonds against default cost 59.5 percent upfront and 5 percent a year, according to CMA Datavision prices for credit-default swaps at 11:40 a.m. in London. That means it costs $5.95 million in advance and $500,000 a year to protect $10 million of bonds for five years. The cost is higher than for any other government debt worldwide, Bloomberg data show.

Eastern Woes

Eastern Europe’s economies have been hit by financial meltdown and economic recession, which have dried up demand for exports while shutting off credit and investment.

Latvia’s credit rating was cut to junk by S&P yesterday, the second European Union nation to receive such a grade, because of a “worsening external outlook” triggered by the global financial crisis.

Fitch Ratings cut Ukraine’s ratings to B, the fifth-highest non-investment grade on Feb. 12 and kept the outlook “negative,” indicating they may fall further. Moody’s said yesterday it may cut Ukraine’s ratings within three months.

S&P lowered Ukraine’s credit ratings twice in 2008 on concern over the country’s banking system, weakening hryvnia and slowing economic growth.

S&P defines an obligation rated CCC as “currently vulnerable to nonpayment, and is dependent upon favorable business, financial and economic conditions for the obligor to meet its financial commitment on the obligation. In the event of adverse business, financial, or economic conditions, the obligor is not likely to have the capacity to meet its financial commitment on the obligation.”

Ukraine’s growth slowed to 2.1 percent last year, compared with 7.6 percent the previous year. The economy may contract 9 percent this year, according to Alexander Morozov, the chief economist in Moscow for HSBC Holdings Plc, Europe’s biggest bank.

Bloomberg

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