Ukraine Hit By Downgrading

KIEV, Ukraine -- Pressure mounted on Ukraine’s shaky banking system when Moody’s cut the country’s credit rating after two top banks missed payments on debt obligations.

Moody’s said its rating cut reflected the continuing fragility’ of Kiev’s banks.

The ratings agency, which downgraded 19 of Ukraine’s 180-plus banks on Tuesday, said it had assigned a negative outlook, reflecting “the continuing fragility” of Kiev’s economy and its banks.

Kiev bankers called Moody’s downgrade alarmist, insisting a financial meltdown was not on the way. They said the country was in a very difficult situation and that western lenders would help prevent a possible spillover of Kiev’s problems into Europe, whose banks control about 40 per cent of the domestic market.

However, a top western banker said the Moody’s report was a “warning”, taking note that the challenges facing Ukraine were still ahead. “Ukraine is not in a meltdown but in a financial freeze.”

Andriy Kravetz, deputy finance minister, said on Tuesday: “We were shocked by the downgrade by Moody’s after the decision by the IMF to grant Ukraine an additional tranche.”

Moody’s cited capital controls for rationing foreign currency implemented by Kiev’s central bank last month as a “supplementary” worry. “These controls have already contributed to a foreign payments default by one of Ukraine’s banks,” Moody’s said, referring to the Ukrainian subsidiary of Alfa Group, controlled by Russian oligarch Mikhail Fridman. Alfa Bank Ukraine blamed the tighter currency rules for its late payment on its $100m Eurobonds, which were redeemed within a given grace period.

Ukraine’s central bank on May 7 said Alfa’s foreign currency holdings exceeded the amount due.

Moody’s said the capital controls “heighten the possibility of default” by Ukrainian corporations and banks, which are struggling this year to pay off or restructure more than $10bn in foreign currency debt. There are fresh signs of trouble brewing at other top Ukrainian banks. Late last month, a bank controlled by Ukraine’s richest man, Rinat Akhmetov, fell into technical default on a $10m payment.

It is currently seeking to restructure debts. Stockholm-based Swedbank told Bloomberg on Wednesday that it would seek to sell parts of its Ukrainian and Baltic operations to western lenders in return for fresh capital injections.

The International Monetary Fund on May 8 unfroze a $16.4bn standby credit granted last year. The Fund’s first $4.5bn tranche, granted late last year, helped stabilise Kiev’s banks. An additional $2.8bn will arrive this month, delayed for months because of concerns over Kiev’s financial prudence and political stability.

However, concerns and uncertainty loom. And the majority of Kiev’s banks, many small-pocket banks owned by domestic businessman, have nowhere to turn. Consolidation is coming but some are expected to go bust.

Source: The Financial Times