Moody`s downgraded Ukraine`s foreign and local currency government bond ratings to B2 from B1 with a "negative" outlook on Tuesday, citing a deteriorating macroeconomic situation and uncertainty over capital controls, Reuters reported.

Moody`s referred to the case of Alfa Bank Ukraine which last week entered technical default, saying it was unable to purchase dollars on the interbank market to repay a bond due to central bank limits. Alfa paid the $100 million before a final May 11 deadline.

"A supplementary reason for the downgrades is the uncertainty generated by a series of capital controls implemented by the central bank to ration foreign currency," Moody Vice-President Jonathan Schiffer said.

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"These controls have already contributed to a foreign payments default by one of Ukraine`s banks." Moody`s also said a worsening economic situation, the increase in non-performing loans and political infighting in the run-up to a presidential election that has delayed policy making have all contributed to the downgrade.

It said the `negative` outlook means it would continue to watch for the government`s and the central bank`s ability to combat the financial crises.