This morning, Standard & Poor’s lowered Ukraine’s long-term rating from ‘CCC+’ to ‘CCC’.
You need to register, but the full S&P note can be found here.
Here are the four key bullets:
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.
We now believe it is likely that Ukraine will default in the absence of significantly favourable changes in circumstances, which we do not anticipate.
We are therefore lowering our long-term foreign currency sovereign credit rating on Ukraine to ‘CCC’ from ‘CCC+’.
The negative outlook reflects our view that the Ukrainian government has yet to secure sufficient external funding to avoid a selective default or distressed exchange.
And here’s more from the announcement:
In our view, the expected financial support from Russia is becoming increasingly uncertain and dependent on the outcome of the deteriorating political situation in Ukraine. The clashes between protesters and security forces that began on Feb. 18 lead us to conclude that a conciliatory end to the political stand-off is now out of reach. We consider that the future of the current Ukrainian leadership is now more uncertain than at any time since the protests began in November 2013. We believe that the Russian government’s support for Ukraine is tied to the current leadership and its political orientation away from the EU and toward Russia.
As a result of the intensifying political turmoil in Ukraine, we consider that continued Russian support up to the committed $US15 billion is increasingly uncertain. Should Russian financial support fall short of Russia’s commitments, we expect the government of Ukraine to default on its foreign-currency obligations. We estimate that the government, National Bank of Ukraine (NBU; the central bank), and state-owned gas company Naftogaz have about $US13 billion in foreign currency debt service to make in 2014. Ukraine’s international reserves fell to $US17.8 billion in January 2014 from $US20.4 billion in December 2013. At the same time, Ukraine’s large current account deficit, at about 9% of GDP in 2013, and elevated household demand for foreign currency will also put pressure on Ukraine’s foreign currency reserves.
We had understood that the $US15 billion of direct Russian financial support to Ukraine would be fully disbursed before the second half of 2014. This amount constitutes about 8% of Ukraine’s 2014 GDP, and $US3 billion has been disbursed to date. However, 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. 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.We note that Russia suspended the disbursement of $US2 billion in January 2014, and has delayed disbursement of the same amount that was expected on Feb. 19, 2014, in light of political developments in Ukraine. Russia only announced the support package in December 2013.
We expect that alternative financial assistance from the U.S., EU, or IMF to be tied to likely conditions associated with a formal IMF lending program, including increased exchange rate flexibility, policies to strengthen the financial sector, fiscal consolidation, increases in domestic energy tariffs, and comprehensive structural reforms to improve the business climate and support growth. In our view, the incumbent Ukrainian government is disinclined to endorse this policy direction. Should the current leadership fall as a result of the political conflict engulfing the country, we have little visibility of what government might follow and what its policy priorities might be. The opposition and protestors appear to be less cohesive than the opposition movement during the Orange Revolution in 2004-2005, and so far no obvious leader with a similarly broad authority and credibility to the current leadership has emerged.
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