Moody's downgrades Ukraine, citing worsening finances

Moody's lowered Ukraine's bond rating by one notch to Caa1 on Friday and warned of a further cut, saying government reserves were running dry and problems with Russia could worsen. "The country's foreign-exchange reserves are already at a very low level," Moody's said. "Pressure on reserves is likely to rise due to increased domestic demand for foreign currency in the autumn and significant foreign currency-denominated debt repayments until end-2014." Moody's also said that there were diminishing prospects that the International Monetary Fund would provide a new support loan program for the country, because of government actions at odds with requirements under a previous, canceled IMF program. In addition, Moody's said, the country was facing deteriorating relations with its giant neighbor Russia, impacting the economy, as it seeks to sign an Association Agreement with the European Union. Moody's said Ukraine's foreign currency reserves had fallen 30 percent in a year to $19.7 billion at the end of August, enough to cover just 2.3 months' worth of imports. Reserves could sink even more, it said, in coming months "due to increased demand from the domestic population, higher gas imports and downside risks to exports." In addition, the country needs to pay out $10.8 billion on its foreign debt from now through the end of 2014, likely to strain finances. After a 2010 IMF support program of $15.3 billion was frozen and then canceled at the end of last year, Moody's said the prospects for a new one were looking worse. It pointed to the Ukraine treasury's possible plan to raise money by issuing promissory notes, "an instrument that the IMF is unlikely to favor." That and other issues will add to existing, unresolved points of disagreement between the Ukraine government and the Fund over too-low energy prices, a fixed exchange rate and fiscal issues. More possible problems with Russia also cloud the country's future, Moody's said. "Russia has been explicit about its disapproval of a potential Ukraine-EU Association Agreement" slated for signing in November. "While Moody's views the prospects of signing this agreement as credit positive for Ukraine in the medium-term... the short-term credit negative impact of a negative reaction by Russia outweighs these benefits." It pointed to Moscow's recent restrictions on imports from Ukraine, threatening a key source of foreign income. Moody's warned that its rating -- which already holds the country's bonds deep in "junk" territory -- is "subject to significant downward pressure" that could lead to another downgrade.