Ukrainian state railway firm Ukrzaliznytsia has failed to repay a US$440mn portion of a Barclays Capital-led loan.
Following the news, questions have been raised regarding the risk of a cross-default between the state railway’s syndicated loan and its state-guaranteed Deutsche Bank loan.
"There is no sovereign guarantee for this loan," notes Moody's analyst Jonathan Schiffer, "and there are no cross-default clauses between this loan and a second Ukrzaliznytsia loan arranged by Deutsche Bank that does contain a government guarantee for US$700mn that would trigger a sovereign default."
Ukrzaliznytsia is meeting payments for the Deutsche Bank loan. The government of Ukraine itself has no major debt payments until March 2010 and a very light foreign currency debt payment schedule for 2010 in comparison to available foreign currency reserves, according to Moody's.
"While there have been defaults by quasi-sovereign corporations such as Ukrzaliznytsia and Naftogaz, to date the sovereign has not shown any weakening in its intention to pay its own debts," says Schiffer.
Moody's left Ukraine’s sovereign rating unchanged. In May, the debt ratings of the government were downgraded to B2 with a negative outlook.
The Ukrainian government clearly does not wish to assume responsibility for outstanding debt of quasi-sovereign corporates and banks. The authorities seem to prefer to conserve foreign currency reserves for the purposes of paying the government’s own foreign currency debt.
Nevertheless, Moody's mentions Ukraine’s weak macroeconomic fundamentals, a banking system that remains under strain, and distinctly poor coordination between fiscal and monetary policies.
The budget deficit in the run-up to the presidential elections in January-February 2010 is also reason for concern. The fiscal loosening inherent in recent legislation may raise the budget deficit up to 7% of GDP in 2010.
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