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S&P Cuts Ukraine Ratings, Says Default 'Virtually Inevitable'

Rating company views default as inevitable, but the form it takes is ‘highly uncertain’. Standard & Poor’s cut Ukraine’s credit rating Friday, saying risks to the country regaining sustainable economic growth depend on factors outside its control.

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This article originally appeared in 
The Wall Street Journal

Standard & Poor’s Ratings Services on Friday cut Ukraine’s credit rating further into junk territory, reflecting its view that an eventual default is “virtually inevitable.”

<figcaption>Kiev government is keeping the currency exchange rate 22-25 to the dollar </figcaption>
Kiev government is keeping the currency exchange rate 22-25 to the dollar

Separately on Friday, S&P affirmed France’s sovereign rating at double-A and Spain’s at triple-B.

The latest downgrade at S&P, to double-C from triple-C-minus, comes as Ukraine embarks on a restructuring of its foreign currency commercial debt, coupled with a deteriorating macroeconomic environment. The action follows downgrades at Moody’s Investors Service and Fitch Ratings earlier this year.

Debt restructuring talks to cover $15.3 billion in financing needs are expected to begin soon and end in May, S&P said, and are part of an extended International Monetary Fund bailout. In March, the IMF approved an emergency $17.5 billion loan that is part of a broader $40 billion international bailout package designed to help keep the country afloat amid Russian aggression and a free-falling currency.

“Under our criteria, we expect we would classify an exchange offer or similar restructuring of Ukraine’s foreign currency debt as tantamount to default,” the rating company said in a news release.

S&P views default as inevitable, but the form it takes, in terms of a potential haircut, maturity extensions and coupon reductions, is “highly uncertain.”

The treatment of the eurobond owed to Russia, which matures in December, further complicates matters, S&P said. Russia has asserted that the $3 billion Kiev owes Moscow by the end of the year is “official” debt, which, unlike a “private” debt designation, means future IMF disbursements could be nixed and would require private creditors bear a bigger share of the debt-relief burden. The IMF has yet to decide if Ukraine’s debt to Russia is “official.”

According to S&P, the biggest risks to regaining sustainable economic growth, and therefore sustainable debt levels, depend primarily on factors that are outside of Ukraine’s control. As such, the rating company’s outlook on the country’s creditworthiness remains negative.

S&P last cut Ukraine’s credit ratings in December, at which point the company said it had a negative outlook reflecting significant default risk stemming from delayed IMF disbursements, currency depreciation and a more severe recession.

This week, the IMF said Ukraine is in talks with several countries to provide currency swap lines to boost the country’s emergency cash reserves. The IMF aims to raise Ukraine’s reserves to more than $18 billion by the end of the year, up from about $5.6 billion in March.

Meanwhile, talks scheduled for Tuesday, aimed at keeping natural gas from Russia flowing to Ukraine and on to the rest of Europe, have been canceled. The European Commission, brokering the negotiations, said “technical questions” remain.

While S&P affirmed France’s rating, the company did say its outlook remains negative and that it could take action this year or next if France negatively deviates from the currently projected fiscal path.

S&P’s outlook on Spain remains stable. The country is in position to benefit from weaker oil prices and European Central Bank stimulus measures, the company said, but still expressed caution ahead of elections this year that could have macroeconomic and fiscal-policy implications.

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