Tymoshenko’s Fate Looms as Ukraine CDS Worst: East Europe Credit
Ukraine, eastern Europe’s least-creditworthy borrower, faces $15.3 billion of debt payments in
the next two years as it weighs the fate of a jailed ex-prime
minister and whether to fix its future with the European Union.
The cost to insure Ukraine’s dollar debt against non-payment for five years with credit-default swaps rose 15 basis
points to 966 at 12:41 p.m. in Kyiv. The yield on Ukraine’s
April 2023 dollar notes rose to 9.63 percent, compared with 7.40
percent on similar-maturity debt from Egypt, both carrying the
same B- junk rating at Standard Poor’s.
Ukraine must decide whether to release ex-Premier Yulia Tymoshenko for medical care abroad by an EU summit on Nov.
28-29, a condition to sign a free-trade pact with the 28-member
bloc. Pressure is also building because the nation, whose
currency reserves have fallen by a quarter in the last year, is
locked out of global bond markets, according to Fitch Ratings.
The EU deal “would help alleviate the concerns with
respect to rolling over short-term debt,” Ronald Schneider, who
helps manage 800 million euros ($1.1 billion) of assets at
Raiffeisen Kapitalanlage GmbH in Vienna, said Nov. 13 by phone.
“The situation has deteriorated quite substantially.”
Integration ‘Desire’
Ukraine’s credit-default swaps are the world’s fourth-highest behind Argentina, Venezuela and Cyprus, data compiled by
Bloomberg show. They peaked at 1,122 basis points on Sept. 27
after setting this year’s low of 531 in March.
Signing the EU deal would send a positive message to
investors, according to Blaise Antin, who helps oversee $10
billion of developing-nation debt as head of emerging-market
research at TCW Group Inc. in Los Angeles.
Such an agreement would show “Ukraine’s interest and
desire to further integrate with the large markets to its
West,” Antin said by phone on Nov. 13. It would also be a
signal of potential interest for “liberalizing not only the
economy but also the political system,” he said.
The sovereign next year needs $6.1 billion to service
foreign debt, $1.1 billion to repay the International Monetary
Fund and $1.2 billion to pay back foreign-denominated domestic
debt. It plans to raise $4 billion on global markets, Halyna Pakhachuk, who heads the Finance Ministry’s debt department,
said on Oct. 31.
Russian Option
Russia is irked that its neighbor may pursue the EU pact
instead of its customs union with Belarus and Kazakhstan and has
threatened trade sanctions if the deal proceeds. Joining the
union would shrink Ukraine’s current-account gap by cutting the
price it pays Russia for natural gas.
The EU treaty would increase the chances of a breakthrough
in talks between the IMF and Ukraine over a third bailout in
four years, according to Raiffeisen’s Schneider. As Ukraine
haggled with the Washington-based lender over energy subsidies,
Raiffesisen sold its Ukrainian bonds in September to see how the
EU talks pan out, he said.
Ukraine entered its third recession since 2008 in the
second quarter as demand for its steel exports shriveled.
Central bank reserves dropped to $20.6 billion Oct. 31, less
than three months of imports, a level economists use to gauge
financial stability.
Tymoshenko, who helped overturn President Viktor Yanukovych’s first election victory in the 2004 Orange
Revolution, was sentenced in 2011 to seven years in prison for
abuse of office in a case the EU deems selective justice.
Lawmakers, who’ve been squabbling over a bill to let her get
treatment in Germany for chronic back pain, this week delayed
voting on the legislation until tomorrow at the earliest.
‘Attractive’ Debt
Ukraine isn’t dependent on the EU pact, according to Sergei Strigo, the head of developing-nation debt at asset manager
Amundi, which oversees about $1 trillion. London-based Amundi
holds Ukrainian euro debt because yields trade at “attractive”
levels and the country probably won’t default, he said in an
interview on Nov. 14.
“Ukraine has many options at its disposal — one is the EU
track and one is Russia, which is very positive for the
country,” Strigo said. “All they need to do is choose which
they want to go with.”
Citing strained external finances, Fitch cut Ukraine’s
credit rating on Nov. 8 to B-, six levels below investment grade
and on par with Greece, Cyprus and Egypt. Standard Poor’s (XOP)
lowered its credit grade to the same level on Nov. 1, while
Moody’s Investors Service reduced its assessment of Ukraine to
Caa1 in September.
Extra Yield
The hryvnia has weakened 2 percent against the dollar this
year, compared with a 7.2 percent decline for Russia’s ruble and
a 0.1 percent drop for Poland’s zloty. The extra yield investors
demand to hold Ukraine’s dollar bonds over Treasuries narrowed
one basis point, or 0.01 percentage point, to 879 today, indexes
compiled by JPMorgan Chase Co. show. Poland’s spread is at 137
basis points and Russia’s at 232.
While Yanukovych can see the potential gains from signing
the EU agreement, the recent delays in meeting the bloc’s
conditions are a gamble that probably won’t pay off, according
to Alex Brideau, a senior analyst at Eurasia Group in New York.
“Yanukovych likely understands the political, trade, and
financial benefits that can come with EU integration and wants
the deal to happen,” Brideau said Nov. 18 in an e-mailed note.
“Yet he is making what he believes to be the optimal political
decision on Tymoshenko, while betting the EU will accept his
terms. We believe that this won’t succeed.”
To contact the reporter on this story:
Agnes Lovasz in London at
alovasz@bloomberg.net
To contact the editors responsible for this story:
Balazs Penz at
bpenz@bloomberg.net;
Wojciech Moskwa at
wmoskwa@bloomberg.net