KIEV, Ukraine -- Fears of default by Ukraine's capital Kiev on Monday cast a shadow over positive news on the country's agreement with an IMF mission, underscoring investors' persisting concerns about the ex-Soviet republic's finances.
The Kiev city government said on Monday it was capable of repaying its debt following local media reports of restructuring plans. On Saturday, Ukraine and an International Monetary Fund mission agreed on a new $14.9 billion facility.
"The news around the potential restructuring of the city of Kiev dented sentiment towards Ukraine and the sovereign credit could not decouple entirely from these developments," Barclays Capital said in a note.
"The breakthrough in the IMF negotiations announced over the weekend sparked an initial spread tightening, which quickly fizzled out as the city of Kiev news took centre stage."
The city government said in a statement it had paid an undisclosed amount of interest to local creditors on Monday and would pay interest on a $200 million Eurobond ahead of schedule on July 6.
"Thus, the city again proves its ability and readiness to repay debt in time and in full," the Kiev government, which has three outstanding Eurobonds worth a total of $700 million, said.
Analysts said prices for Kiev bonds had fallen on Monday following reports in Ukrainian media that the city may be unable to service its rising debt and could restructure foreign liabilities.
The reports cited comments by officials made late last week.
"Most probably they have seen the negative market reaction and decided to look for another way (to resolve the debt issue)," said a London-based investment bank analyst who had asked not to be named.
The city could still opt for a "semi-voluntary" debt exchange that would ease the repayment schedule, the analyst said. Others shared this view.
"Given the above, while we can not rule out a restructuring of the Eurobonds, we expect that if one takes place it will be done with the support of the central government," Barclays Capital said.
"We would therefore expect any restructuring to be relatively friendly towards investors, similarly to the Naftogas precedent."
Ukrainian state energy firm Naftogaz last year restructured its entire foreign debt by issuing a $1.6 billion Eurobond with a sovereign guarantee in a scheme approved by most of its creditors.
IMF AGREEMENT
News on Kiev's debt followed the Saturday announcement of Ukraine's preliminary agreement with an International Monetary Fund mission on a $14.9 billion stand-by facility, due to be approved by the IMF board in late July.
Ukraine plans this week to launch a road show for a sovereign Eurobond worth at least $1.3 billion and a default by Kiev would hurt investor sentiment.
"The holders of Kiev bonds are possible investors in the sovereign deal," the London-based analyst said.
The IMF deal, which is a crucial condition for other investments, requires Ukraine to take quick steps to cut budget deficit faster than it had planned.
The IMF board will review it in late July. But before then the Ukrainian parliament may have to hustle to pass legislation and make amendments, particularly to the tax code.
"I think this (meeting IMF loan conditions) will require some dedication," a Kiev-based investment bank analyst said.
"Fiscal deficit is the main issue and that is likely to require certain unpopular measures. It has become clear that the IMF is adopting a tougher approach and promises (of reforms) are no longer enough."
Some analysts are questioning the willingness of President Viktor Yanukovich's new government to radically cut spending by hiking utilities tariffs and raising retirement age.
"...Given Ukraine's poor record of compliance with IMF program conditions, the implementation of stand-by arrangement may prove difficult," Raiffeisen said in a note.
"Therefore, we remain sceptical regarding the issue of timely and proper implementation (which could arise as an issue later this year) and as well cautious on Ukraine's economic prospects, hardly expecting any major breakthrough and full realisation of the country's enormous catch-up potential."
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