Moody’s downgrades Ukraine’s sovereign Eurobonds to Caa1

Moody’s Investors Service downgraded Ukraine’s government bond rating to Caa1 from B3 and placed the rating on review for downgrade, the agency reported on September 20. It referred to Ukraine’s poor foreign currency liquidity position, increased downside risk to negotiations with the IMF, and higher political and economic risks due to deteriorated relations with Russia.

The future review will focus on foreign currency reserves developments (with key risks being demand for dollars from the population and increased natural gas imports in 2H13), the status of IMF negotiations, and the outcome of and Russia’s reaction to the Eastern Partnership Summit in Vilnius on November 28-29.

Moody’s also stated that any regulatory interventions by the central bank to impose capital controls or undermine bond or deposit contracts could trigger a further downgrade.

Alexander Paraschiy: While the downgrade is by itself a strictly negative development, given the items that Moody’s will consider in a future review, we see a high chance that this isn’t the last downgrade for the year. In particular, to avoid a further downgrade, Ukraine will have to not only attract new international loans in the coming month (a task made harder after the new rating), but also reveal real progress in negotiations with the IMF. Ukraine’s failure at the Vilnius summit in end-November will clearly lead to a further downgrade, but even in the case of signing the Association Agreement, Ukraine will have to show how it will respond to Russia’s possible heightened economic pressure.

We totally agree with the “action plan” for Ukraine’s government outlined by Moody’s (an IMF deal, more flexible currency policy), and see pressures on the Ukrainian currency only intensifying. We are now waiting for Moody’s to downgrade other Ukrainian Eurobond issuers, and we do not rule out that other rating agencies will follow with downgrades.