Bloomberg News

Ukraine Invokes Greece to Stave Off IMF as S&P Lowers Outlook

March 15, 2012

Ukraine invoked Greece’s record debt restructuring in a bid to stave off repaying $3 billion to the International Monetary Fund as Standard & Poor’s warned of funding risks and cut the country’s rating outlook to negative.

First Deputy Economy Minister Vadym Kopylov cited last week’s “huge” deal between Greece and holders of its bonds, saying Ukraine may seek a 10-year delay in repaying the IMF under a $16.4 billion rescue program granted in 2008. The lender said it hasn’t been asked to reschedule payments.

The former Soviet republic wants to restart a second $15.6 billion loan, frozen last year because the government, which faces elections this year, refused to raise household utility costs to balance the budget. Ukraine says higher tariffs would hurt consumers and damage economic growth. It’s seeking a discount on the price it pays Russia for natural gas instead.

“Ukraine isn’t a solvency issue like Greece -- it’s a totally different story,” Luis Costa, an emerging-market strategist at Citigroup Inc. in London, said yesterday by e- mail. “This is a pure unwillingness to burn political capital and continue converging domestic energy prices to something more realistic like they were doing in 2010 and early 2011.”

Yields, Swaps Rise

The yield on Ukraine’s dollar bonds due 2013 jumped 53 basis points to 8.101 percent last night in Kiev, the highest level since Feb. 29, data compiled by Bloomberg show.

The cost of insuring government debt against non-payment for five years using credit-default swaps rose 16 basis points to 766, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.

S&P lowered its outlook on Ukraine’s credit rating to negative from stable yesterday, citing “significant” funding risks. It reaffirmed the country’s B+ foreign-currency debt assessment, which is four steps below investment grade and ahead of only Belarus and Bosnia-Herzegovina in eastern Europe.

The outlook reflects “increased risks regarding Ukraine’s significant fiscal and external refinancing needs,” S&P analysts Trevor Cullinan and Ivan Morozov said in an e-mailed statement. Its ratings are constrained by “the government’s unwillingness to make further structural improvements to the public finances.”

‘Why Not?’

Negotiations to restructure Ukraine IMF debt “are on,” Kopylov told reporters yesterday in the capital, Kiev. “Why not? If we have Greece and such huge debts.”

Max Alier, who heads the IMF’s office in Ukraine, said yesterday that the fund has no “mechanisms to restructure or reschedule payments” and hasn’t received “any requests” from the government to do so.

Finance Minister Yuriy Kolobov will visit the U.S. this month to meet the Washington-based lender’s new mission chief for Ukraine, Prime Minister Mykola Azarov said March 13. Ukraine repaid $575 million of debt to the lender in February and is due to payoff about $3.1 billion more by year-end.

Talks between Ukraine and the IMF over resuming the latest bailout have reached a “dead end,” Deputy Premier Sergiy Tigipko said March 14.

President Viktor Yanukovych, who plans to increase social spending by 16 billion hryvnia ($2 billion) or more before October’s parliamentary elections, has repeatedly refused to raise household gas tariffs.

Reserves Dwindle

He’s favored efforts to reduce the price his country pays Russia for the fuel to about $250 per 1,000 cubic meters from more than $400 now to bolster public finances after the central bank’s gold and foreign-currency reserves fell $3.3 billion to $31.8 billion in 2011. They stood at $31 billion as of March 1.

Rescheduling debt payments to the IMF would normally be possible if Ukraine’s latest rescue program wasn’t frozen, according to Tim Ash, head of emerging-market research at Royal Bank of Scotland Group Plc in London.

There’s “little real perspective of the program coming back on track this side of elections,” he said yesterday by e- mail. Government plans to sell Eurobonds may also be in jeopardy with “the relationship with the IMF in such a state of flux.”

The Finance Ministry picked JP Morgan Chase & Co., Morgan Stanley and Russian’s VTB Capital and Troika Dialog, which is controlled by OAO Sberbank, to lead manage a potential Eurobond sale as early as this month, according to a Feb. 3 statement.

Market Conditions

Ukraine can wait until market conditions are right for a planned sale of dollar-denominated bonds as it has sufficient funds to cover debt payments, First Deputy Prime Minister Valery Khoroshkovskyi said Feb. 28. It’s also in talks to borrow cash from Russian banks and plans to refinance a $2 billion loan from VTB Group that matures in June, he added.

Ukraine plans to expand this year’s state-asset sale program to 16.5 billion hryvnia from 10 billion hryvnia to fund additional social spending. Companies to be offered under the plan may include ammonia producer Odeskyi Pryportovyi, Kopylov said yesterday.

The fact Ukraine is considering delaying its IMF debt repayments “demonstrates the extent to which it is running out of options,” Capital Economics said yesterday in an e-mailed note from London. “The government may be able to avoid a financing crisis this year but the public finances are on an unsustainable path.”

To contact the reporter on this story: Daryna Krasnolutska in Kiev at dkrasnolutsk@bloomberg.net

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net


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