UPDATE 3-Ukraine proposes fund for ailing banks, firms

(Releads with president's proposal on stabilisation fund)

By Sabina Zawadzki

KIEV Oct 20 (Reuters) - President Viktor Yushchenko on Monday proposed a fund that could buy out firms and banks in financial trouble to shield Ukraine, seeking a multi-billion dollar IMF loan, from the global financial crisis.

Yushchenko, addressing officials after talks with the International Monetary Fund, said state spending had to be cut to achieve a balanced budget. He proposed cutting the civil service by 20 percent.

"I hereby propose an initiative to create a state stabilisation fund," Yushchenko was shown on live television telling Ukraine's National Security and Defence Council.

"It is not ruled out that resources from this fund could be used to buy enterprises deemed critical to the economy, including commercial banks."

Ukraine exhibited the first symptom of the global crisis when its sixth largest bank, Prominvest, was placed in receivership on Oct. 8. Authorities stress that a run on the bank was caused by rumours of a murky takeover, not foreign investor sentiment.

No other bank has yet been recognised to be in serious trouble, although several have taken advantage of increased central bank refinancing which totals $3.5 billion so far this month, more than triple that in September.

Analysts, however, worry about the ability of the government, firms and banks to refinance their debts as global lending grinds to a halt. Fitch has already cut Ukraine's rating to B+ from BB- and Moody's lowered its outlook to 'stable'.

The hryvnia currency hit an all time low this month at 5.9 to the dollar, undermined by a gaping current account deficit. Many of Ukraine's steel companies -- vital for economic growth -- have cut production dramatically due to a lack of orders as global consumption slows.

IMF CONDITIONS

Financial woes are compounded by constant political turmoil in the ex-Soviet state, now facing its third parliamentary election since the 2004 "Orange Revolution" which swept Yushchenko to power.

Rows between Yushchenko and Prime Minister Yulia Tymoshenko -- allies in the Revolution -- have stalled reforms in the past year since she became prime minister for the second time.

The two leaders met an IMF delegation separately for the second time on Monday to discuss the conditions of a potential loan, which officials have said could total up to $14 billion.

"A package of measures was discussed which, if fulfilled, would enable Ukraine to receive financial and stabilisation support," a statement on the government Web site said.

The presidential Web site quoted the head of the delegation, Ceyla Pazarbasioglu, as saying that the Fund had already "formulated a range of measures that are required".

Neither office described what conditions would be imposed for the loan. The IMF has made no comment on its visit.

Analysts have said the Fund is likely to require greater currency flexibility, higher interest rates and more reforms of the banking sector, though demands were expected to be less stringent than during the 1997 Asian crisis.

Hungary, Iceland and Serbia are also seeking help from the IMF to cushion them from the impact of the global crisis. For a factbox and table, see [ID:nLK279955] [ID:nLK284896]