Ukraine's spreads tighten as risk recedes, S&P raises rating

http://www.marketwatch.com/story/ukraines-spreads-rally-as-political-risk-recedes-2010-03-12?siteid=rss&rss=1

By Polya Lesova, MarketWatch
FRANKFURT (MarketWatch) -- Ukraine's credit spreads narrowed on Friday, indicating a declining probability of default, after the formation of a new governing coalition brought much-needed political stability and prompted a rating upgrade from Standard & Poor's.
Five-year CDS spreads on Ukraine tightened by 34 basis points to 721 on Friday, according to data from Markit.
Spreads have narrowed by 267 basis points over the past 28 days. A tighter spread means that investors are pricing in a lower risk of debt default.
"Ukraine's spreads continued to rally as it took another major step towards political stability," said Gavan Nolan, vice president of credit research at Markit.
In Kiev, a new majority coalition was formed on Thursday and Mykola Azarov, a long-time ally of Yanukovych, was chosen as prime minister.
Investors are breathing a sigh of relief that the long-running battle between President Viktor Yanukovych and former Prime Minister Yulia Tymoshenko appears to be over, at least for now. That battle had crippled policy making at a time when the economy contracted sharply, as demand for Ukraine's steel exports collapsed.
The International Monetary Fund had provided a $16.4 billion aid package, but the fund suspended further loan disbursements because of Ukraine's failure to implement tough fiscal targets.
In response to the formation of a new government, Standard & Poor's raised late Thursday Ukraine's foreign-currency sovereign-credit rating to B-/C from CCC+/C, saying that the once-high level of political risk has receded.
"We believe that today's formation of a new governing coalition and cabinet in Ukraine has paved the way for better policy coordination and a renewal of relations with the IMF," said Standard & Poor's credit analyst Frank Gill in a statement.
The provision of funding under the $16.4 billion IMF standby arrangement will be essential to boost confidence in Ukraine's monetary and economic stability, to finance a component of this year's budget and to help improve the finances of Ukraine's pension system and state-owned Naftogaz, according to S&P.
The outlook on Ukraine's ratings is positive, reflecting the potential for the new government to work together with the president to achieve a more sustainable budgetary position, Gill said.
On Friday, Ukraine's benchmark PFTS stock index gained 2.4% to 819 points in afternoon trading.
"Investors likely will be relieved at the return of a measure of political stability, and the fact that early parliamentary elections were avoided," said Alex Brideau, an analyst at Eurasia Group, adding that passage of the 2010 budget in April is now a realistic scenario.
The timing of a lending restart under the IMF's program will depend in part on how the Azarov-led government addresses the fund's concerns about high social benefits spending, Brideau said.
Polya Lesova is reporter for MarketWatch, based in FrankfurtBy Polya Lesova, MarketWatch