Ukraine Credit Rating Cut Further by S&P on Protracted War and Nation Reliant on Donations

Global ratings agency S&P cut Ukraine’s credit rating further Friday, in a move that was not unexpected and follows Moody’s earlier move in the week. It also assigned a negative outlook, saying risks from the military conflict could undermine the government’s ability to meet its debt obligations. The moves flow on from S&P and Fitch swiftly cutting Ukraine on default worries. Russia’s debt was cut to junk back then. The International Monetary Fund is exploring all options to aid Ukraine with further financial support, said its head, Kristalina Georgieva.

The Russian declaration of war on Ukraine has ravaged both countries finances and people with severe consequences for both countries. The result of Russian President’s Putin’s actions with have turned the conflict into a protected war.

On Friday S&P Global Ratings cut Ukraine’s rating by one notch to CCC+ with a negative outlook to the country as risks to the economy, external balances, public finances and financial stability stemming from the war might undermine the government’s ability to meet its debt obligations, S&P said in a statement. 

“The Ukraine government’s capacity to meet its foreign-currency commercial debt payments is contingent on the flow of donor support,” according to the statement published Friday. 

CCC+ puts Ukraine’s debt on par with Argentina and Mozambique, and only five notches above default.

Last week Moody’s Investors Service cut Ukraine’s credit rating to the third-lowest level, also citing risks around the nation’s debt sustainability amid a more drawn-out conflict than expected. 

Initial Reactions After Russia Invaded Ukraine

S&P Ratings

S&P lowered Russia’s long-term foreign currency credit rating to ‘BB+’ from ‘BBB-‘. The agency warned it could lower ratings further, after getting more clarity on the macroeconomic repercussions of the sanctions.

“In our view, the sanctions announced to date could carry significant negative implications for the Russian banking sector’s ability to act as a financial intermediary for international trade” S&P said.

S&P also cut Ukraine’s rating to ‘B-‘ from ‘B’.

Moody’s Ratings

Moody’s has placed Russia’s ratings on review. Moody’s currently has Russia on an “investment grade” rating of Baa3 due to one of the lowest debt levels in the world at just 20% of GDP, and nearly $650 billion of currency reserves.

“The decision to place the ratings on review for downgrade reflects the negative credit implications for Russia’s credit profile from the additional and more severe sanctions being imposed,” Moody’s said in a statement.

A downgrade would lower that rating to the riskier “junk” or sub-investment grade category.

Moody’s said its decision would factor in the scale of the conflict and the severity of additional Western sanctions, which have already hit some of Russia’s top banks, military exports and members of President Vladimir Putin’s inner circle.  The degree to which Russia’s substantial currency reserves are able to mitigate the disruption stemming from the new sanctions and lengthy conflict will be part of the equation.

“Moody’s will look to conclude the review when these credit implications become more clear, particularly when the impact of further sanctions takes shape in the coming days or weeks,” it said.

There are “serious concerns” around Russia’s ability to manage the disruptive impact of new sanctions on its economy, public finances and financial system, Moody’s said on Friday.

Moody’s also put Ukraine’s already-junk “B3” rating on review for a downgrade.

Fitch Ratings

Fitch has Russia at BBB- and moved quickly to downgrade Ukraine. Fitch cut its Ukraine rating by three notches to “CCC” from “B”.

“There is a high likelihood of an extended period of political instability, with regime change a likely objective of President Putin, creating heightened policy uncertainty and potentially also undermining the willingness of Ukraine to repay debt.”‘

Fitch said on Ukraine

Russia has been shoring up its finances with Russia’s central bank been adding billions to its banking sector with billions in additional foreign exchange and Rouble liquidity. Putin’s government has pledged full-scale support to sanctions-hit companies.

Russia was cut to junk by Moody’s and S&P in early 2015 after the annexation of Crimea and the plunging oil prices caused a Rouble currency crisis.

Source: S&P, Moody’s, Fitch

From The TradersCommunity US Research Desk