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Comments »Feb. 25 (Bloomberg) — Ukraine’s credit rating was cut two levels by Standard & Poor’s to the lowest in Europe, a day after Latvia was downgraded to junk, as eastern Europe’s most debt- laden economies lurch closer to default.
The long-term foreign currency rating was lowered to CCC+, seven levels below investment grade, the rating company said in an e-mailed statement today, saying political turmoil poses growing risks to the country’s International Monetary Fund loan. The rating is on a par with Pakistan and S&P left the outlook negative, indicating a possible further cut.
The global financial crisis is taking its toll on emerging Europe by cutting access to credit and investment after years of unprecedented growth as the region integrated with the wealthier west. The meltdown, coupled with political turmoil that has slowed economic restructuring, forced Ukraine to turn to the IMF for a $16.4 billion loan in November.
“Ukraine has been near default since at least November, so this downgrade is recognizing reality,” said Paul McNamara, who helps manage $1.2 billion of emerging-market debt at Augustus Asset Managers Ltd., on the sidelines of a conference in London. “Repayment of debt due this year depends on the success of the IMF rescue package, which isn’t looking good.”
Slumping Markets
Contracts to protect Ukraine’s government bonds against default cost 59.5 percent upfront and 5 percent a year, according to CMA Datavision prices for credit-default swaps at 11:40 a.m. in London. That means it costs $5.95 million in advance and $500,000 a year to protect $10 million of bonds for five years. The cost is higher than for any other government debt worldwide, Bloomberg data show.
The hyrvnia has lost more than 50 percent against the dollar in the past six months as reduced demand for exports and a lack of foreign credit causes Ukraine’s first economic contraction in a decade. The situation has been aggravated by a power struggle between President Viktor Yushchenko and Prime Minister Yulia Timoshenko, delaying decisions needed to revive the economy and putting the second installment of the IMF bailout at risk.
“Hopefully S&P’s move will concentrate minds in the cabinet of ministers, the presidential palace and the central bank,” said Timothy Ash, head of central Europe, Middle East and Africa research at Royal Bank of Scotland Group Plc in London, in an e- mailed note to clients.
Not Alone
Ukraine is not alone in its plight. East Europe as a whole will slide into a recession this year as demand for exports collapses, the IMF, which has also bailed out Latvia, Hungary, Serbia, and Belarus, said last month. The economies will shrink 0.4 percent, the IMF predicted.
Latvia’s credit rating was cut to junk by S&P yesterday, the second European Union nation to receive such a grade, because of a “worsening external outlook” triggered by the global crisis.
The Baltic state’s government collapsed this week, a month after street protests over the deteriorating state of the economy turned violent. Latvia’s economy shrank an annual 10.5 percent in the fourth quarter.
Fitch Ratings cut Ukraine’s ratings to B, the fifth-highest non-investment grade on Feb. 12 and kept the outlook “negative,” indicating they may fall further. Moody’s said yesterday it may cut Ukraine’s ratings within three months.
S&P lowered Ukraine’s credit ratings twice in 2008 on concern over the country’s banking system, weakening hryvnia and slowing economic growth.
‘Vulnerable to Nonpayment”
“If we continue cooperation with the IMF, we will get $9.6 billion this year from it, which would provide very good support for the stabilization of the economy and the currency,” Ukraine’s central bank First Vice Governor Analtoliy Shapovalov told reporters in Kiev today.
S&P defines an obligation rated CCC as “currently vulnerable to nonpayment, and is dependent upon favorable business, financial and economic conditions for the obligor to meet its financial commitment on the obligation. In the event of adverse business, financial, or economic conditions, the obligor is not likely to have the capacity to meet its financial commitment on the obligation.”
Ukraine’s growth slowed to 2.1 percent last year, compared with 7.6 percent the previous year. The economy may contract 9 percent this year, according to Alexander Morozov, the chief economist in Moscow for HSBC Holdings Plc, Europe’s biggest bank.
Sterling going down dragging the U.K. with it
Comments »Feb. 25 (Bloomberg) — European Union officials are concerned that the pound’s slide to a record low against the euro could destabilize the British economy, according to a document prepared last month by European Commission and EU finance ministry officials.
The pound’s “very rapid” drop “raises questions about the financial stability of the British economy,” said the document, which was prepared ahead of the Feb. 14 Group of Seven meeting in Rome and obtained by Bloomberg News. The currency’s weakness “is a source of concern for the euro area.”
The report contradicts Prime Minister Gordon Brown’s argument on Feb. 13 that a weaker currency helps rather than hinders the economy. With the pound down 18 percent against the euro in the past year, it also underscores investors’ concern about Britain’s fiscal health as the government racks up debt to fund bank bailouts.
The one-page document, titled “Recent exchange rate developments – G7 preparation,” was circulated at a meeting of EU officials before the G-7 gathering in Rome. The document also outlined the EU’s position on the U.S. dollar, the yuan and the yen before discussing the pound.
The Obama administration’s expressed support for a “strong dollar” is “reassuring,” the document says. It also calls for a “continued real effective appreciation” of the yuan against the euro. Japanese authorities “should not intervene to reverse the past appreciation of the yen,” it says.
Pound’s Slump
The document signals concern among euro-area policy makers that the pound’s slump could push their 16-nation economy deeper into a recession by undermining exports to its biggest trading partner.
Gross domestic product in Britain contracted 1.5 percent in the fourth quarter, the most since 1980, as companies and consumers reduced spending, the Office for National Statistics said today. The economy shrank 1.9 percent on the year.
A U.K. Treasury official who declined to be named said the government doesn’t comment on movements in currency markets.
The U.K. currency fell 23 percent against the euro last year as confidence in Britain’s fiscal health weakened, export demand dried up and Bank of England cut interest rates to records. The pound reached a record low of 98 pence per euro in late December. It traded at 88.40 pence per euro at 10:04 a.m. in London.
‘More Competitive’
“As the pound has gone down, we’re more competitive,” Brown said Feb. 13. “We’re not trying to target the exchange rate like people used to do.”
At the same time, his government has taken on liabilities that may amount to 1.5 trillion pounds ($2.2 trillion) as it tries to prop up the financial system and rescue banks such as Lloyds Banking Group Plc and Royal Bank of Scotland Group Plc.
Officials “should be alive to the possibility that weakness in the pound will just scare off foreign investors,” Neil Mackinnon, chief economist at ECU Plc in London and a former U.K. Treasury official, said in an interview on Bloomberg Television today. “The U.K. economy is certainly in a recession if not a mini depression.”
Europe’s officials are concerned that global currency volatility could roil markets and destabilize their economies.
“Exceptionally high volatility and unprecedented sharp moves in the foreign-exchange market have adverse implications for economic and financial stability and are especially unwelcome in the current economic environment,” the draft document said. “In a context of low inflation in all major economies, any large moves will translate into big real exchange rate swings that could lead to competitive distortions.”
French and Irish finance ministers have already openly questioned the U.K.’s management of its currency.
France’s Christine Lagarde said Jan. 21 that the Bank of England’s monetary policy “isn’t very efficient in providing more support” for the pound. Ireland’s Brian Lenihan said that Britain is engaging in “competitive devaluation.”
