World Economy

Fitch Downgrades Ukraine Sovereign Debt

Fitch Downgrades Ukraine Sovereign DebtFitch Downgrades Ukraine Sovereign Debt

The rating agency Fitch downgraded Ukraine’s foreign currency denominated sovereign debt on Friday from CCC to CC, citing a probable default and deteriorating creditworthiness, the credit agency said in a statement.

“The downgrade of Ukraine’s long-term foreign currency IDR [Issuer Default Rating] to ‘CC’ … indicates that a default of some kind appears probable,” Sputnik quoted the statement as saying.

The agency explained that the conflict in Ukraine and overall economic weakness have resulted in a greater financing needs than previously estimated.

Fitch maintains Ukraine’s junk bond CCC rating on local currency debt.

The factors contributing to the downgrade, according to the rating agency, include losses at Ukraine’s state energy company Naftogaz that have reached 13 percent of GDP in 2014, and the increase in direct and guaranteed Ukrainian debt to 72 percent of GDP in 2014.

  GDP Growth

A negative GDP growth in 2014 and projections of a contraction of 5 percent this year also weighed heavily on the decision to downgrade, Fitch said.

A $17.5 billion IMF loan deal with Ukraine reached this week would help Kiev finance debt, the agency explained, “but an associated restructuring of privately-held external debt appears increasingly probable.”

The steep decline in Ukraine’s currency over the past year “is leading to a sharp external adjustment” and contraction in imports. As of January Ukraine has only 1.3 months of foreign exchange reserves for imports, Fitch said.

A further downgrade would be possible if there is an announcement to restructure debt with private external creditors, lack of progress on reforms and suspension of IMF funding, and an escalation of the conflict in eastern Ukraine, according to the rating agency.

“We currently do not envisage a situation in the short term in which the rating would be upgraded,” Fitch said.

On February 7, Fitch downgraded Ukraine’s long-term foreign currency issuer default rating (IDR) by two notches, to CCC from B-, citing political instability and the deteriorating economic picture.

  New Bail-Out

The International Monetary Fund (IMF) announced that it would probably grant Ukraine a new bail-out.

Some have reported a $17.5 billion bail-out; others a $40 billion figure. In fact, the “new” bail-out is only worth around $5 billion. That is because the IMF already pledged $17 billion back in April, of which only $5 billion has been actually disbursed. In other words, the fund is making good old promises, rather than offering any new cash.

Christine Lagarde, the head of the IMF, hopes that by the time other western donors pile in, Ukraine will get about $40 billion-worth of cash. That is very optimistic. If the IMF disburses all the money it has promised, it will disburse about $18 billion over the next four years. America and the European Union have, vaguely, promised about $2 billion each.