Ukrainian Bonds Plummet as Government Unity Efforts Stumble

(Bloomberg – bloomberg.com – Natasha Doff, Daryna Krasnolutska – February 5, 2016)

Ukrainian government bonds plunged as efforts faltered to shore up the ruling coalition after a key reformer quit and accused presidential party members of corruption.

Notes issued in November after a $15 billion restructuring are poised for their worst week in the wake of comments from the parliament speaker that Ukraine is entering a “serious political crisis.” While President Petro Poroshenko is seeking to rally members of the pro-European administration and plans personnel changes this month to ease tensions, the Samopomich coalition party Friday demanded the entire cabinet be fired.

Ukraine’s government, which swept to power in 2014 after pro-European street protests opposing years of corruption, has seen its ratings plummet over delays in reforms. The latest storm was triggered by the resignation of Economy Minister Aivaras Abromavicius, who said presidential allies want to block overhauls of the ex-Soviet republic’s institutions. The U.S., which has made billions of dollars in aid contingent on progress to reshape the economy, expressed its disappointment at Abromavicius’s exit.

“The coalition is likely to fall apart this year, though not immediately,” Eurasia Group analyst Alex Brideau said in an e-mailed note. Poroshenko “likely prefers maintaining the status quo for the moment. Prime Minister Arseniy Yatsenyuk will probably stay on to lead a reshuffled cabinet. But any move to address the problem in the coming weeks will only temporarily ease the situation.”

The yield on dollar bonds due September 2019 jumped 26 basis points to 10.21 percent by 12 p.m. in Kiev, the highest level since the new notes were issued on Nov. 17. That takes the weekly increase to 83 basis points. The hryvnia has lost 9.9 percent against the dollar this year, the worst performance among 10 eastern European currencies tracked by Bloomberg. The central bank said it sold dollars Friday as political friction spread to the currency market.

Yatsenyuk reaffirmed his commitment to reforms at an emergency government meeting Thursday, while four ministers who earlier submitted resignations said they were ready to return. That wasn’t enough to convince the coalition member Samopomich, a party based in western Ukraine that controls 26 of parliament’s 450 seats.

“Corruption is infectious,” Oleh Berezyuk, who heads Samopomich in the legislature, said Friday on Facebook. “What’s going on in the government ruins democracy in Ukraine. Samopomich’s position is the same — we need to fire the kleptocratic cabinet, headed by Prime Minister Arseniy Yatsenyuk and form a new one.”

Poroshenko on Thursday met ambassadors from Group of Seven countries and the European Union as well as Yatsenyuk to discuss the pace of reforms and the situation with the cabinet, which is also still grappling with the war in Ukraine’s east.

“The government needs an urgent reboot,” Poroshenko said on his website after the meeting, urging reform-minded ministers to stay. The ambassadors called for unity among Ukrainian authorities, according to the statement. Abromavicius, a Lithuanian-born former fund manager, didn’t participate in Thursday’s government meeting and won’t return, his press secretary Oleg Shimanskyy said.

Ukraine’s efforts to stamp out corruption brought scant progress last year, according to Transparency International, which said in January that civil society, journalists and whistle-blowers were more effective than government officials in combating graft. The nation of 43 million people ranked 130th of 168 countries in the Berlin-based watchdog’s Corruption Perceptions Index, level with Iran and Cameroon.

The results of Ukraine’s anti-graft endeavors — key to the continued flow of financial aid, including a $17.5 billion loan from the International Monetary Fund — will be assessed by lawmakers during the week of Feb. 15, when Yatsenyuk is scheduled to report to parliament on his cabinet’s performance. IMF Managing Director Christine Lagarde expressed concern over Abromavicius’s resignation and urged the government to step up its anti-graft efforts.

Ukraine’s rulers will “do the minimum” to keep the IMF on board, according to Viktor Szabo, who helps manage $12 billion of emerging-market debt, including Ukrainian bonds, for Aberdeen Asset Management Plc in London. He sees more turbulence ahead.

“The chance of early elections has increased,” Szabo said. “The risk is clearly that other big names will be leaving.”

Article ©2016 Bloomberg L.P. All Rights Reserved. Article also appeared at bloomberg.com/news/articles/2016-02-05/ukrainian-bonds-plummet-as-government-unity-efforts-stumble