You're reading: Five signs of Ukraine’s looming financial horror

Financial markets reacted immediately to the escalting violence in Ukraine that claimed at least 26 lives on Feb. 18-19 and injured hundreds of people. The political troubles bled into the economic ones, renewing talk about a possible government default on debts unless a substantial foreign bailout is forthcoming.

Even the next $2 billion purchase of Ukraine’s bonds by Russia, coming on top of a $3 billion purchase in December, is not bringing much optimism.

“Giving money to
Ukraine is like throwing it in a black hole,” said Volodymyr Ovcharenko,
analyst for Kinto asset management company.

The National Bank of Ukraine’s foreign
currency reserves sank to $17.7 billion in January, while Ukraine has
$7.09 billion of foreign debt that must be repaid or refinanced this year. Whether this discomfort leads to panick will be known soon enough.

Below are five signs showing Ukraine’s poor financial state amid a political crisis:

1.     
Currency rate. On Feb. 19, the hryvnia
exchange rate reached Hr 9 against dollar on the interbank market after Hr 8.3 at the end of last year. This means servicing debts denominated in foreign currency is much pricier. “You may see some
corporate defaults if the Ukrainian currency keeps falling,” says Chris Weafer,
senior partner at Macro Advisory financial consultancy.

2.     
Eurobond yields. The yield on Ukraine’s
June 2014 dollar bond jumped 3.79 percentage points, to 26.72 percent, on Feb. 19,
while the original annual coupon is 7.95 percent. With such a spread between
nominal and market yields, borrowing becomes almost impossible for the country.

3.     
Credit default swaps spreads reached 1225 basis points on Feb. 19. It means that if you
purchase $10 million of Ukrainian debt securities and want to insure invested
money if country defaults, you have to pay $1.225 million for such an
insurance. In case of the US, you would have to pay only $0.028 million; in the case
of Poland, $0.080 million. Deutsche Bank assesses Ukraine’s probability of
default at 12.6%.

4.     
Kiev Prime index is storming historical heights, reaching 22 percent
for one-month loans on Feb. 18. This is the mean interest rate under which
Ukrainian banks loan money to each other on the market. The pricier the money
is for the banks, the more problems their clients have in getting loans.

5.      The index of the Ukrainian Exchange dropped by 4.2 percent on Feb. 18, followed by a 2.04
percent decline the next day. This is a significant decrease. The local stock
market is rather small, but it is still an indicator of investors’ mood. Moreover, the Ukrainian Exchange does not always react even to the major political events fully, due to the lack of liquidity, meaning that stock market could fall even deeper
if liquidity was higher.

Kyiv Post associate business editor Ivan Verstyuk can be reached at
[email protected].