Ukraine Debt Rating Downgraded to Lowest Possible

Standard & Poor, one of the big three credit rating agencies, now rates Ukraine bonds at CCC- - the lowest possible rating without actually being in default

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This article originally appeared in Financial Times

Standard & Poor's has cut Ukraine's credit rating to a lowly triple-C – one of the lowest rungs possible without actually being in default – and warned that the outlook was negative on concerns that a sovereign default is looming next year.

Ukraine has received billions from the International Monetary Fund, the US and Europe already, but Russia's annexation of Crimea and nurturing of a separatist rebellion in Ukraine's industrial heartlands has clobbered the economy and caused the bailout programme to unravel.

The IMF estimates that Ukraine needs $15bn in the short term to tide it over and avoid a full financial crisis and default, but the fund, the US and Europe are bickering over who pays what - and want Kiev to prove its reformist credentials

S&P noted that a default "could become inevitable in the next few months" if more international aid does not arrive swiftly.

We had previously anticipated that IMF disbursements would be paid to Ukraine in 2014, but these have been delayed. In our view, this delay, coupled with significantly reduced foreign currency official reserves, increases the risk that the Ukrainian government might not be able to meet its obligations.

A default could become inevitable in the next few months if circumstances do not change, for instance if additional international financial support is not forthcoming.

The rating agency argues that the remaining $10.7bn in the IMF programme will all have to go towards covering the government's budget deficit, which would leave nothing to cover gas payments to Russia or service – let alone repay – international debts.

S&P says that the government will have less than $1bn at hand at the start of 2015, but $1.6bn of debts are due for payment in the first quarter. The government could use some of the central bank's $10bn reserves, but that only covers a few weeks of imports – a critically low level even for a crisis-struck country.

The IMF earlier today praised the Ukrainian government's "broad and comprehensive" plan to fix its broken economy, but fund, the EU and the US continue to wrangle over who will pay for programme top-up that Kiev sorely needs.

S&P therefore also put a negative outlook on Ukraine's already terrible credit rating, and concluded:

Any further substantial delay in IMF disbursements would make it extremely difficult for the government to meet its debt obligations in the short term. We note that, even with continued disbursements, the program only buys Ukraine a limited amount of time. Further significant depreciation of the exchange rate, a more severe recession, and larger-than-expected deterioration of the fiscal and external balances, would place a lot of pressure on Ukraine's ability to meet its gross financing needs without additional international financial support.

S&P's main economic and financial projections [ENLARGE]
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