Ukraine's Bonds Fall As Government Splits

KIEV -- Ukrainian bonds declined on Wednesday after the country's ruling coalition split, fueling speculation the government will be dissolved.

The drop sent seven-year yields to a four-year high after President Viktor Yushchenko's Our Ukraine Party withdrew from its alliance with Prime Minister Yulia Tymoshenko late Tuesday, two days after his office said her failure to condemn Russia's war with Georgia may end their cooperation.

The two lawmakers have squabbled over issues, such as how best to curb the nation's 26.8 percent inflation rate, since joining forces in early 2005.

The yield on the 6.875 percent note due 2011 climbed 15 basis points, the steepest daily gain in three weeks, to 8.17 percent, the highest level since May 2004.

The 7.65 percent bond maturing in 2013 yielded 8.66 percent, up 12 basis points.

"The risk of new elections and the instability that would bring will probably see yields head even higher," said Alexander Pecherytsyn, a fixed-income analyst with ING in Kiev.

"This reduces the attention of government bodies to the economy," he said.

The cost of protecting Ukrainian government debt from default rose 20 basis points to a record 465 Wednesday, according to CMA Datavision prices at 1:30 p.m. in London.

Ukraine's hryvna snapped a three-day decline, rising to 4.7475 per dollar by 2:33 p.m. in Kiev, from 4.7600 Tuesday, when it slipped 1.7 percent.

Ukrainian Finance Minister Viktor Pynzenyk said Wednesday the country was sticking to its plans for a Eurobond and domestic debt issues.

"We will issue debt on both domestic and external markets when the suitable moment arrives," Pynzenyk said.

Ukraine had previously been expected to issue a five-year $500 million Eurobond in September, having delayed the issue in July due to deteriorating conditions in the global credit market and rising premiums on its debt.

Ratings agency Fitch said the political situation could deter foreign investment, but said it saw no immediate risk of a ratings downgrade.

Ukraine is still left with a 2008 planned budget deficit of 18.8 billion hryvna ($3.97 billion) -- about 2 percent of GDP -- and needs to find the cash to plug the gap, through borrowing and privatizations.

It can borrow 7.8 billion hryvna on the domestic market, and 8.1 billion abroad, according to the 2008 budget.

But the privatization program is frozen and so far Ukraine has only managed to borrow around 10 percent of the planned funds -- less than 800 million hryvna ($169 million) through domestic bonds plus a $150 million loan from the World Bank.

Next year's budget plans are due to be submitted to parliament by Sept. 15, but Pynzenyk declined to forecast the size of the deficit that they may feature.

(Bloomberg, Reuters)