EMERGING MARKETS-Ukraine's assets hit, Russia's rouble sets all-time euro low

by Reuters
Wednesday, 19 February 2014 10:45 GMT

By Natsuko Waki

LONDON, Feb 19 (Reuters) - Ukraine's sovereign bonds and currency tumbled on Wednesday as a renewed wave of violence hit the capital Kiev, adding pressure on Russia's rouble which has hit an all-time low against the euro.

The rouble's weakness stemmed mainly from the finance ministry's plan to buy foreign currency to replenish one of its sovereign wealth funds. Moscow shares also fell sharply.

Protesters poured into central Kiev square on Wednesday, a day after at least 25 people were killed in demonstrations. Protests that began in November have hit the heavily indebted economy and drained the central bank of foreign reserves.

"The situation is obviously aggravating. It looks like it's just going to get worse before it gets better," said Ilan Solot, emerging currency strategist at Brown Brothers Harriman.

Ukraine's dollar bonds fell across the curve. The bond maturing in 2023 hit all-time lows of 80.50.

The 2020 dollar bond lost 0.4 cents of a dollar while 2014 bonds also fell over 1.5 cents .

The cost of insuring Ukraine's debt for five years shot up to 1,271 basis points, the highest since December 2009, according to Markit.

Bank of America Merrill Lynch said Ukraine has total maturing debt of about $9 billion this year, out of which Ukraine would have to pay the IMF about $3.6 billion, with the main share of payments due in the first half of 2014.

The country also has to pay $600 million in interest on its external debt in the first half and its $1 billion eurobond due in June. But foreign reserves are at an eight-year low of $18 billion after the central bank has spent about 8 percent of its reserves on currency intervention in January alone.

"In the absence of clarity in politics in the next few months, we see risks of liquidity problems," BofA-ML said in a note to clients.

Ukraine non-deliverable forward rates implied a 10 percent fall in the hryvnia in six months' time.

The hryvnia currency fell to a fresh five-year low of 9.0 per dollar but dealers said trading was very thin.


Russia is a key supporter of Ukraine President Viktor Yanukovich and has agreed to pay $2 billion of a promised $15 billion aid package to the heavily indebted economy.

The rouble hit an all-time low versus the euro, trading nearly half a percent down on the day at 49.03. It fell 1.6 percent to 35.68 per dollar, its weakest since 2009.

This has pushed the rouble to a fresh low of 41.65 against the dollar-euro basket the central bank uses to gauge the currency's nominal exchange rate.

Russia's finance ministry said on Tuesday it would buy nearly $6 billion in foreign currency on the market, a move that will decrease the central bank's daily foreign exchange market interventions.

Russian stocks also traded lower, with the RTS index down 2 percent. The finance ministry cancelled its weekly auction of treasury bonds due to lack of demand.

Some of the mood spread to other areas of central and eastern Europe and there was general weakness across emerging markets.

The Hungarian forint lost 1.3 percent to 312.56 per euro , a day after the central bank cut interest rates by a bigger-than-expected 15 basis points on Tuesday.

Hungary, which has the highest debt in the region, is vulnerable after the central bank's move bucked the trend of other emerging economies, such as Turkey, which have raised rates.

The Turkish lira, South African rand and Indian rupee -- some of the Fragile Five economies with a high reliance on external capital -- all fell against the dollar.

The benchmark MSCI equity index was flat on the day, with strong Chinese stocks countering negative sentiment from Ukraine and Russia.

"We're looking at a confidence crisis in EM. EM has become a dirty market word. We've had a severe market correction. Hedge funds are looking at maximum short positions on EM," Benoit Anne, head of emerging market strategy at Societe Generale, told the Emerging Markets Trade Association late on Tuesday.

"The only macro strategy that worked was short EM. It's done fantastically well. But real money is eager to go back in and I see renewed appetite."

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