MBS Blog

Ukraine’s credit rating continued its slide and is now on par with that of Pakistan. As reported at www.bloomberg.com, Ukraine has the lowest rating in Europe. Concurrent with this news, the Ukrainian currency-the hryvnia (UAH)-has been moving steadily downward and is rapidly approaching 10 hryvnia to 1 U.S. dollar. Just as $4USD gasoline was the tipping point in the United States that led to political change, 10 hryvnia to the dollar may be the trip wire here.

Locally, the prices in stores and restaurants have been increasing, while the availability of imported food is declining.  Here in Odessa,  famed Deribasovskaya Street in the very center of the city has seen real estate sales prices decline from a stratospheric $4,000+ per square meter to $1,200 and lower…with more price discounting expected to follow.

Ukraine Ratings Cut to CCC+ by S&P on IMF Loan Risk 

By Daryna Krasnolutska

Feb. 25 (Bloomberg) — Ukraine’s credit rating was cut two levels by Standard & Poor’s, a day after Latvia was downgraded to junk, because political turmoil poses growing risks to the country’s International Monetary Fund loan.

The long-term foreign currency rating was lowered to CCC+, seven levels below investment grade, the rating company said in an e-mailed statement. Ukraine’s rating is now the lowest in Europe and on a par with Pakistan. S&P left Ukraine’s outlook negative, indicating it may reduce the ratings further.

Ukraine turned to the International Monetary Fund for a $16.4 billion loan in November after its financial system and markets were battered by the global financial crisis and economic downturn. The country’s ability to meet IMF terms by cutting spending has been hampered by the battle between President Viktor Yushchenko and Prime Minister Yulia Timoshenko, who planned a 5 percent budget deficit this year, the president’s office claims.

“The downgrades reflect intensifying execution risks associated with Ukraine’s arrangement with the IMF, due to the absence of broad political backing for necessary budgetary revisions and banking system reform ahead of the January 2010 presidential elections,” S&P said in the statement.

Contracts to protect Ukraine’s government bonds against default cost 59.5 percent upfront and 5 percent a year, according to CMA Datavision prices for credit-default swaps at 11:40 a.m. in London. That means it costs $5.95 million in advance and $500,000 a year to protect $10 million of bonds for five years. The cost is higher than for any other government debt worldwide, Bloomberg data show.

Eastern Woes

Eastern Europe’s economies have been hit by financial meltdown and economic recession, which have dried up demand for exports while shutting off credit and investment.

Latvia’s credit rating was cut to junk by S&P yesterday, the second European Union nation to receive such a grade, because of a “worsening external outlook” triggered by the global financial crisis.

Fitch Ratings cut Ukraine’s ratings to B, the fifth-highest non-investment grade on Feb. 12 and kept the outlook “negative,” indicating they may fall further. Moody’s said yesterday it may cut Ukraine’s ratings within three months.

S&P lowered Ukraine’s credit ratings twice in 2008 on concern over the country’s banking system, weakening hryvnia and slowing economic growth.

S&P defines an obligation rated CCC as “currently vulnerable to nonpayment, and is dependent upon favorable business, financial and economic conditions for the obligor to meet its financial commitment on the obligation. In the event of adverse business, financial, or economic conditions, the obligor is not likely to have the capacity to meet its financial commitment on the obligation.”

Ukraine’s growth slowed to 2.1 percent last year, compared with 7.6 percent the previous year. The economy may contract 9 percent this year, according toAlexander Morozov, the chief economist in Moscow for HSBC Holdings Plc, Europe’s biggest bank.