Ukrainian interbank lending rates soared to a one-year high as policy makers' bid to prop up the currency depletes cash from the economy and threatens to deepen the country's third recession since 2008.
The KievPrime overnight index, which shows one-day borrowing costs for the country's lenders, jumped to 20 percent at today's daily fixing from 12 percent on Dec. 6 and 4.32 percent on Nov. 29. Investors sold Ukraine's dollar notes, driving yields to record highs, after the country's foreign reserves dwindled 9 percent last month, according to central bank data published on Dec. 6.
The surge in rates that banks charge each other for short-term loans signals that Ukraine's efforts to prevent a devaluation are creating cash shortages that could hinder lending in an economy that shrank 1.5 percent in the third quarter. Pressure on the hryvnia has mounted as hundreds of thousands of anti-government protesters demonstrated in Kiev last weekend to maintain pressure on President Viktor Yanukovych, after he halted talks on a pact with the European Union last month in favor of bolstering ties with Russia.
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Interbank liquidity "started to evaporate" mainly because of the "massive interventions" that "helped calm devaluation pressure" on the hryvnia, Vladislav Sochinsky, treasurer at Citigroup Inc.'s unit in Kiev, said by e-mail today. "The central bank has reiterated that their key task is to keep interest rates at a low level to allow lending to economy."
The yield on Ukraine's June 2014 dollar note advanced 2.46 percentage points to a record 20.86 percent at 8:22 p.m. in Kiev. The rate on bonds due in April 2023 increased 42 basis points to 10.80 percent, the highest since the securities were sold eight months ago, according to data compiled by Bloomberg.
The selloff came after Russia cast doubt on imminent assistance for its neighbor today. Five-year credit-default swaps, derivatives used to insure against non-payment, rose 28 basis points to 11.26 percentage points, the highest since January 2010, data compiled by Bloomberg show.
Sochinsky said that existing central bank liquidity tools may be able to "calm the spike" in deposit rates. The central bank press service declined to reply to Bloomberg requests for comment on interbank liquidity today.
Dwindling Reserves
Ukraine's foreign-currency reserves, which have dwindled more than $6 billion in the last year to $18.79 billion on Nov. 30, the lowest since 2006, may dip below $18 billion this month amid the political "crisis and subsequent tension on the forex market," Alexander Paraschiy, head of research at Concorde Capital in Kiev, said in a research note today.
The hryvnia strengthened 0.5 percent to 8.1710 per dollar today. The currency weakened to an intraday low of 8.29 on Dec. 3, Citigroup's Sochinsky said.
Shrinking reserves "should prompt the government to act to resolve the political crisis; otherwise, it can lose its control over the forex market," Paraschiy said.
Ukraine, a former Soviet republic that depends on Russia for 60 percent of its gas consumption, needs at least $10 billion in loans to improve its balance of payments and avoid a default, the Interfax news service cited First Deputy Premier Serhiy Arbuzov as saying Dec. 7. The government has rejected conditions for a bailout from the International Monetary Fund, which included higher energy prices.
Investors sold bonds as Sergei Markov, a political adviser to Vladimir Putin's staff, said the Russian President "believes that time is on his side" in negotiations with Ukrainian counterpart Viktor Yanukovych over closer economic ties including a customs union.
"It will be difficult for Yanukovych to secure either Russian money or a bailout" from the EU or the IMF, Timothy Ash, chief emerging-markets economist at Standard Bank Group Ltd. in London, said by e-mail today.
Ukraine faces almost $17 billion of debt payments in the next two years, according to data compiled by Bloomberg. The government sold 2.2 billion hryvnia of local-currency notes due in five and seven years today at an average yield of 14.25 percent and 14.3 percent respectively, the finance ministry said on its website.
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