Ukraine Default Risk Climbing One Year on From Maidan

(Bloomberg – bloomberg.com – Marton Eder – November 13, 2014) Almost one year after the Maidan Square demonstrations began in central Kiev, Ukraine’s record-high borrowing costs are showing how difficult the path toward Europe has become.

The yield on Ukraine’s dollar-denominated note due in July 2017 hit a record 17.95 percent yesterday, almost quadruple the average borrowing cost for emerging markets, before falling to 17.34 percent today. The cost to insure the nation’s debt against non-payment shows a 60 percent probability of default within five years, according to CMA.

From the ousting of former President Viktor Yanukovych in February amid protests that pushed Ukraine toward closer ties with the European Union to Russian President Vladimir Putin’s annexation of Crimea a month later and the separatist uprising in the nation’s east, bondholders have been rocked by turmoil that has deepened the country’s political and economic crises. The hryvnia weakened to a record yesterday as NATO accused Russia of sending troops and heavy weapons into Ukraine.

“The main determinant is what Putin has in mind,” Regis Chatellier, a director of emerging-markets credit strategy at Societe Generale SA, who maintains an underweight recommendation for Ukrainian assets, said by e-mail from London yesterday. “If the combat were to intensify, Ukrainian yields would definitely push higher.”

Upfront Costs

It costs $3 million upfront and $500,000 annually to insure $10 million of Ukraine’s debt for five years, according to CMA. Credit-default swaps are the highest worldwide after Venezuela, data compiled by Bloomberg show.

The hryvnia extended losses yesterday as U.S. Air Force General Philip Breedlove, NATO’s top military commander, told reporters in Bulgariathat “columns of Russian equipment,” primarily tanks, artillery and air-defense systems, were entering Ukraine along with combat troops. Russia’s Defense Ministry denied the accusations, according to state-run RIA Novosti.

“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 yesterday. “It is all nerve-wracking and investors will think about Russia and Ukraine worse and worse the longer this situation continues.”

Not Enough

Economists from the International Monetary Fund started a visit to Ukraine this week to review the country’s economy and progress under its $17 billion aid program to help cover the country’s bills. The nation will need more foreign loans to get by, IMF Managing Director Christine Lagarde said on Oct. 9.

The Ukraine bonds due in 2017 fell to 82.6 cents on the dollar yesterday, the lowest since they were sold in 2012, data compiled by Bloomberg show. The yield has increased 3.95 percentage points this month, the biggest since the start of the crisis.

The hryvnia rebounded today after falling to a record 15.99 per dollar yesterday. It traded 2.1 percent stronger at 15.53 by 6:31 p.m. in Kiev, trimming this year’s slide to 47 percent. That’s the biggest drop worldwide, surpassing a 29 percent depreciation in the Russian ruble, which is the second-worst performer.

Ukraine’s central bank raised its key discount rate to 14 percent effective today, the bank said in a statement on its website yesterday.

The separatists, aided by Russian backers, are amassing troops in the areas of the Donetsk and Luhansk regions they’ve seized in the past months, Ukrainian Defense Minister Stepan Poltorak told a government meeting in Kiev yesterday. German Foreign Minister Frank-Walter Steinmeier said the conflict was turning unpredictable.

“I don’t see any optimism in the bond prices, I see fear from war,” Sergey Fursa, a Kiev-based fixed-income trader at Dragon Capital, said by e-mail Nov. 10. “I can’t predict Putin’s behavior. I feel that he doesn’t need any war in the short term, but we did not expect the Crimea annexation either.”

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