S&P downgrades Ukraine’s credit rating, warns country may default due to political turmoil

SOURCE: state.gov

Standard & Poor’s downgraded Ukraine’s credit rating to “CCC” and warned the country will likely default if the political turmoil continues.

The ratings downgrade was issued early Friday morning after deadly violence erupted in Kiev’s Maidan [Independence] Square this week.

At least 75 people have been killed when anti-Yanukovych protestors clashed with police. At least 25 people were reportedly killed and more than 1,000 injured on Feb. 18-19th, and a truce declared on Wednesday quickly fell apart and the death toll grew by at least 50 on Thursday.

Massive and largely peaceful have been held in Maidan Square since late November after President Victor Yanukovych suspended talks on the European Union-Ukraine Association Agreement, which has been considered an important step toward establishing closer economic and political ties with the EU. The protestors are demanding new elections and Yanukovych, who favors closer relations with Russia, to resign.

“In our view, the political situation in Ukraine has deteriorated substantially. We believe that this puts the government’s capability to meet debt service at increasing risk, and raises uncertainty regarding the continued provision of Russian financial support over the course of 2014,” according to S&P’s statement. “We now believe it is likely that Ukraine will default in the absence of significantly favorable changes in circumstances, which we do not anticipate.”

S&P also downgraded Ukraine’s short-term sovereign debt to “C”, which is one step away from default.

The agency estimated that Ukraine has to pay about $13 billion in foreign debt this year but the country’s reserve has dropped to $17.8 billion in January while its deficit is climbing to 9% of last year’s GDP [gross domestic product].

Complicating matters is the pressure on the Ukraine’s currency, hryvnia, which has been devalued as more and more Ukrainians turn to using foreign currencies. Further devaluation of hryvnia will make it harder for Ukraine to pay its foreign debts.

In December, Russian President Vladimir Putin offered Ukraine a $15 billion bail-out, but has since been placed on hold.

S&P noted that Russia’s loan appears to be “tied to the current leadership [of Yanukovych] and its political orientation away from the EU and toward Russia”.

But given the deteriorating political turmoil and Russia’s suspension of its bailout, S&P concluded that Ukraine will likely default on its debt obligations.

“The deterioration in the political situation in Ukraine, resulting in the loss of at least 25 lives, suggests to us that opposition to the Ukrainian government’s current financing arrangements – and to President [Yanukovych] remaining in power – could be sufficient to prevent Russia from providing the committed funding,” according to S&P. “In our view, this would result in the Ukrainian government being unable to meet its debt service in a timely manner. No alternative funding sources have yet been found.”

The agency pointed out that Yanukovych’s government would likely reject financial support from the U.S., EU, or IMF that are tied to reforms.

S&P stated that there is a one-in-three chance that Ukraine’s credit rating could be downgraded again in the next 12 months unless “significant favorable changes in circumstances” take place.

A senior State Department official, speaking to reporters on background, said the “only viable route” to save Ukraine’s economic health is through the IMF.

“An IMF agreement unlocks all kinds of other vehicles – EU vehicles, U.S. vehicles, EBRD [European Bank for Reconstruction and Development], and other kinds of international support – that could help the Ukrainians make the structural adjustments and transition their economy back to health,” said the senior State Department Official.

The official pointed out that it is not in Russia’s interest for Ukraine to default because there is about $40 billion in Russian bank exposure in Ukraine.

“It is both in the interest of Ukraine, the interest of Russia, the interest of Europe, and the interest of the United States…that we have to move on from there [ending the violence] and ensure that this very, very fragile Ukrainian economy is stabilized,” he said.

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One Comment on “S&P downgrades Ukraine’s credit rating, warns country may default due to political turmoil

  1. Pingback: Ukraine likens pro-Russian separatists to "terrorists" after downing of MH17 | What The Folly?!

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