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Ukraine Credit Rating Sinks; State Firm Seeks Debt Help

Prime Minister Yulia Tymoshenko has warned a delay in the IMF's release this month would make life "extremely difficult" for Ukraine.
KYIV (Reuters) -- Fitch has cut Ukraine's credit rating and said a delay in IMF funding coupled with a huge budget gap would lead to more instability, a warning underscored by another state firm seeking to restructure its debts.

Ukraine is in the grip of a deep economic recession that has been made worse by political rivalry, intensified in the run-up to a January presidential election, that has derailed Kyiv's cooperation with the International Monetary Fund (IMF).

Prime Minister Yulia Tymoshenko has already warned a delay in the IMF's release of $3.8 billion this month would make life "extremely difficult" for Ukraine and other ministers have said Kyiv's ability to make timely payments for Russian natural gas could be affected.

Such warnings unnerve European leaders who want to avoid another energy row between Kyiv and Moscow during the winter similar to January when Russia cut gas supplies, including those intended to transit Ukraine, and left hundreds of thousands in the cold.

Tymoshenko blames the IMF delay on President Viktor Yushchenko, a bitter rival in the election, because he approved a minimum wage rise that the fund opposed. He accuses her of driving the country to ruin through populist policies funded by borrowed billions.

Fitch estimated this year's budget gap would balloon to 11 percent of gross domestic product (GDP) -- including government aid given to state energy company Naftogaz, which purchases the gas from Russia. The IMF funds would have helped cover that gap.

But now, "Fitch sees an elevated risk that Ukraine could resort more heavily to monetary financing via central bank providing liquidity to banks -- effectively printing money.

"This would in turn risk undermining the fragile confidence in the currency and the banking system, and/or a rapid loss of foreign exchange reserves."

Fitch spelled out the dire figures behind its "negative" outlook for its B- rating: the national currency, the hryvnya, has fallen 60 percent in a year; GDP contracted more than 18 percent in the second quarter compared with a year ago; and bad loans amount to 30 percent of all lending.

More Debt Restructuring

State railway company Ukrzalyznitsya has approached its creditors to restructure its dollar loan just a week after Naftogaz, often at the center of the gas rows with Russia, managed to change the terms of its foreign debts.

Acting Finance Minister Ihor Umansky said on November 11 the firm failed to repay $118 million of the $550 million syndicated loan that had been organized by Barclays.

The railway company "should have paid $110 million of the debt and $8 million in coupon payments," Umansky told reporters. "Ukrzalyznitsya has made some proposals to the holders of the debt, which was organized by Barclays."

The loan was organized in July 2007 and matures next year, according to Thomson Reuters Loan Pricing Corp data. It had a two-year grace period, which would have run out this summer.

Umansky said the size of the loan was $440 million after the company made some of the principal payments. Ukrzalyznitsya itself was not immediately available for comment.

Analysts believe the debt did not have a state guarantee. The government did not guarantee Naftogaz' $500 million Eurobond, whose looming maturity at the end of September sparked the company's restructuring talks.

But some worry this loan has clauses that would force the company to repay other debts in the event of a default, including a $700 million loan that may have a state guarantee.

Naftogaz finally issued a $1.595 billion five-year Eurobond with a sovereign guarantee in exchange for its earlier Eurobond and three bilateral loans.