Contracts to protect Ukraine’s government bonds against default cost 59.5 percent upfront and 5 percent a year, according to CMA Datavision prices for credit-default swaps as of yesterday. That means it costs $5.95 million in advance and $500,000 a year to protect $10 million of bonds for five years. The cost is higher than for any other government debt worldwide, Bloomberg data show.
The swap prices imply a 69.6 percent chance Ukraine will default in the next two years and 91.8 percent in the next five years, according to CMA, which didn’t have any prices for today as the market is very illiquid.
The hryvnia has lost more than 50 percent against the dollar in the past six months as reduced demand for exports and a lack of foreign credit causes Ukraine’s first economic contraction in a decade. The situation has been aggravated by a power struggle between President Viktor Yushchenko and Prime Minister Yulia Timoshenko, delaying decisions needed to revive the economy and putting the second installment of the IMF bailout at risk.
Credit Rating Cut
Bloomberg reports that Ukraine's credit rating has been cut by S&P to CCC+ with a possible further cut. Now that this has happened, perhaps Tymoshenko will rethink her decision to amend the budget in May? This new event may embolden Yushchenko to continue his struggle with the prime minister and may accelerate a cabinet shuffle. I do not think that new election will be called in Spring, but it depends on how the government reacts to this latest setback, can it get the second part of the IMF loan?
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