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12-18-2008, 10:25 AM

Hryvnia Plunges 17% as Ukraine Fails to Ease Default Concern

By Laura Cochrane and Emma O’Brien

Dec. 18 (Bloomberg) -- Ukraine’s hryvnia plunged 17 percent in two days to a record low against the dollar as a pledge by President Viktor Yushchenko to support the currency failed to ease concern that most of the country’s loans risk default.

The currency fell 7 percent today, reaching 9.65 per dollar at 2:30 p.m. in Kiev, adding to a 44 percent drop this year. It continued to slide after Yushchenko said Ukraine will buy hryvnia and called for licenses to be revoked for lenders found speculating against the currency. The central bank said it will raise its benchmark refinancing rate from 12 percent to an unspecified level to stem the decline.

Ukraine is attempting to arrest a deepening crisis since the International Monetary Fund provided a $16.4 billion bailout last month as the falling currency increases the cost of more than half of loans from domestic lenders that are in dollars, according to central bank data. The ex-Soviet nation, with $105 billion of corporate and state debt, has the third-highest credit risk worldwide after Ecuador, which defaulted last week, and Argentina, based on the cost of credit-default swaps.

“Yushchenko’s poll ratings are at record lows so I’m not sure how much confidence the man on the Kiev metro has in his abilities to manage this crisis,” Timothy Ash, head of central Europe, Middle East and Africa research at Royal Bank of Scotland Group Plc in London.

An exchange rate near 9 per dollar means 60 percent of foreign-currency loans and mortgages may not be repaid, Roman Zhukovskyi, head of the social and economic department in the president’s office, said in a televised press conference in Kiev yesterday.

‘Serious Staff Decision’

“There will be corporate defaults and banking consolidations,” said Ali Al-Eyd, an economist at Citigroup Inc. in London. “The plunge in the foreign exchange is going to bite and only reinforces the negative trends developing in the economy. Growth is going to stall.”

Ukrainian companies need to repay as much as $4.1 billion of debt in December as lenders refuse to refinance the debt amid the worst global financial crisis since the Great Depression, according to Dmitry Gourov, an economist focusing on Ukraine at UniCredit SpA in Vienna. Dollar loans made up 53 percent of credit issued by Ukrainian lenders as of Sept. 30, according to the central bank Web site.

Yushchenko threatened the central bank with a “serious staff decision” if it fails to stabilize the hryvnia and demanded that policy makers revoke the licenses of speculators.

“We will have stricter monetary policy,” central bank Governor Volodymyr Stelmakh said. The bank is holding a meeting this afternoon to discuss further policy and Petro Poroshenko, head of the central bank council, will hold a press conference at 5 p.m. in Kiev.

Dollar Sale

The central bank will sell dollars today at a rate of 8.95 per dollar and tomorrow at 8.7 per dollar, Finance Minister Viktor Pynzenyk said in televised remarks.

The central bank attempted to manage the hryvnia’s decline since October by buying and selling foreign-exchange reserves. Natsionalnyi Bank Ukrainy drained $3.4 billion in November and $4.1 billion in the previous month, reducing reserves to $32.7 billion on Nov. 30.

Further intervention is curtailed by Ukraine’s agreement with the IMF, which prevents reserves from falling below $31.4 billion by the end of the year and calls on the central bank to move toward a flexible exchange-rate regime. Ukraine’s economy, which has expanded at an annual pace of 7 percent since 2000, will probably slow to 2 percent this year, central bank adviser Valeriy Lytvytskyi said on Dec. 15.