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Ukraine: T-Bill Sales Slow

Kyiv, 30 April 1998 (RFE/RL) -- Western analysts say Ukraine has taken on a dangerous currency risk by issuing high yield Eurobonds to meet its budget deficit. Analysts say the move betrays the desperation of a country teetering on the brink of financial crisis.

Meanwhile, officials in Washington and Brussels are concerned about the positive response some investors have shown by buying Ukraine's Eurobonds. In February, the treasury in Kyiv tapped the European debt market for the first time with a three-year, 750 million D-Mark issue that offered the widest spread ever over German bonds and yields -- more than double the spread for Russian government paper.

That issue was followed by a less-popular $540 million Eurobond issue in early March. Kyiv reportedly is considering more sales of D-Mark denominated bonds along with a yen-denominated Samurai bond.

What troubles western officials is whether Kyiv will be able to pay off the increasing debt burden, and if so, what effect the massive outpouring of hard currency will have on Ukraine's hryvna currency. Ukraine has been given a B-2 credit rating from Moody's investors service. That is the lowest Moody's rating in Eastern Europe and the former Soviet Union. It is matched only by the credit rating for Turkmenistan and Bulgaria.

But Kyiv has few alternatives to borrowing from abroad. Foreigners investors who used to account for about half of the domestic T-bill market stopped buying last fall after Asia's financial crisis broke. Delays in Ukraine's market reform program have not helped matters. With the hot money gone, T-bill yields have soared to nearly 50 percent.

President Leonid Kuchma recently called the T-bill market "a vacuum cleaner sucking all financial resources out of the economy." He said domestic borrowing is driving the country toward bankruptcy.

Ukraine must repay about to 8,000 million hryvnas ($3.9 billion) when T-bill payments come due this year. The biggest drag on the government cash flow will come during the summer. Foreign investors are due to redeem $550 million in T-bills in June and $500 million in July.

The only solution from Kyiv so far has been to borrow more. In April, the government boosted its ceiling on 1998 domestic debt issues to 11.5 billion hryvnas. That is nearly four times the limit that had been called for in December.

Western analysts say the government has put itself in a difficult position because it has been unable and unwilling to live within its financial means. Despite a backlog of more than 2,500 million hryvnas in unpaid wages owed to public workers, last year's deficit ballooned from a planned 5.7 percent of GDP to nearly 7 percent. This year's target was to be 3.3 percent of gross domestic product. But it already is running twice that high.

The government now proposes to cut the deficit to 2.6 percent of GDP. Multilateral lenders who have suspended loans to Kyiv because of its lack of fiscal control have heard such promises before. Credit Suisse First Boston estimated in March that Ukraine has so far accumulated only about 20 percent of the money it will need to cover this year's budget deficit and meet its debt payments.

Paul Gregory, head of research at Alfa Capital, said western investors are becoming leery about the situation.

The central bank's hard currency reserves of $2.4 billion represent enough to cover just six weeks of exports. The same bank must try to keep the hryvna within its promised trading band of no more than 2.25 to the dollar for the remainder of this year.