S&P Cuts Ukraine Ratings, Says IMF Deal at Risk

Standard & Poor's (S&P) cut its ratings on Ukraine by two notches on Wednesday, citing absence of political will for budget revisions required as part of the country's deal with the International Monetary Fund (IMF).

The ratings agency downgraded Ukraine's long- and short-term foreign currency credit ratings to "CCC+/C" from "B/B" and its local currency ratings to "B-/C" from "B+/B."

"The downgrades reflect intensifying execution risks associated with Ukraine's standby arrangement with the IMF, due to the absence of broad political backing for necessary budgetary revisions and banking system reform ahead of the January 2010 presidential elections," S&P said in a statement.

Ukraine's $16.4 billion loan program with the IMF stalled after Kiev penciled in a 3 percent budget deficit contrary to conditions of the deal.

An IMF mission left Ukraine two weeks ago without completing its review of the ex-Soviet state's stricken economy or disbursing a $1.84 billion tranche.

AP

The IMF has not said when talks with Ukraine will resume.

"In our opinion, weak institutions and frequent turnover of senior officials point to the risk of non-completion of the 24-month IMF program, particularly as necessary fiscal tightening may reinforce the economic downturn and risk a social backlash," S&P said.

It added that the likelihood of Ukrainian officials restricting non-sovereign access to foreign exchange had also risen.

"We believe the precariousness of Ukraine's fiscal and economic situation is heightened by the absence of readily available external budgetary funding, implying that the government may resort to more heterodox and inflationary government debt funding," it said.

It maintained its "4" recovery rating on Ukraine's foreign currency debt, saying the country's post-default recovery could be in the 30-50 percent range.

Luis Costa, emerging market debt strategist at Commerzbank, said market reaction to the S&P would likely be muted.

"I don't believe in a massive selloff at this point. But a possible reaction is the political pressure to find common ground and change the budget as soon as they can to enable an IMF package," he said.

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