German Eurobond Costs Ukraine 16%

LONDON -- Ukraine is paying the highest interest ever for a Deutsche mark Eurobond as it struggles with a weak economy, while its domestic borrowing dries up.

Ukraine paid 16 percent to sell 750 million marks ($414.4 million) of three-year bonds. It is having increasing trouble attracting foreign investors to the domestic treasury-bill market, while the International Monetary Fund and World Bank are providing only a trickle of funds.

The sale signaled investors are willing to buy emerging-market debt again after tumbling Asian currencies increased concern about emerging market risk and hammered the debt of low-grade borrowers. Ukraine is one of a few emerging market borrowers to sell a bond in the past four months.

The 16 percent yield is 1,183 basis points more than German government securities.

"It's a huge pickup over anywhere else, and it adequately reflects the risk, or it's certainly getting there," said Keith Swabey, who manages about $500 million in emerging market bonds at Fleming Investment Management in London.

By comparison, Turkey, whose credit rating from Moody's Investors Service is one notch above Ukraine's at "B1," plans to sell seven-year bonds tomorrow yielding about 430 basis points more than the 5.6 percent yields of a comparable U.S. Treasury bond maturing in 2005, or about 9.9 percent.

Over the past year, feuds between Ukraine's parliament and president have slowed the government's efforts to sell state companies and to put other economic measures in place. Ukraine only in recent months began receiving monthly payments on a $542 million IMF loan, which had been held up by concern about the government's exceeding budget deficit targets. The IMF has delayed talks on another loan of as much as $2.7 billion on concern about the deficit, state asset sales and other measures.

Investors are demanding a record yield on Ukraine bonds, partly because they are concerned about the validity of the government's numbers.

"I don't feel sufficiently confident that I know the real figures," said Bob Attridge, who oversees about $50 million in emerging market bonds for Old Mutual Asset Managers (Britain) Ltd. "There are too many doubts."

The government forecasts Ukraine's economy will grow 0.5 percent in 1998, following a 3.2 percent contraction in 1997.

Ukraine had to offer a high return also "because the economy hasn't entered the recovery phase, and we don't know when it's going to happen," Barbara Peitsch, emerging market economist at Santander Investment Securities. "They haven't turned the corner yet."

On inflation, Deputy Prime Minister Serhiy Tyhypko told investors earlier this week Ukraine's inflation rate will drop to 6 percent in 1998 from 10.1 percent last year.

Tyhypko also said last month Ukraine aims to raise $1 billion through asset sales, half of which would go into the budget. Earlier this week, he told investors 1998 asset sales would raise $500 million.

"They're trying to say what they think the market wants to hear," Peitsch said.

Over the past four months, as foreign investors' aversion to high risk has increased, they have been pulling out of Ukraine's domestic T-bill market.

Last month, to help stem the flow out of the local currency, Ukraine allowed the hryvna to weaken to a trading range of 1.8 to 2.25 to the dollar. Last year, the range was 1.75-1.95.