UPDATE 1-EMERGING MARKETS-Ukraine hryvnia at record low, Russian assets hit

Wed Feb 26, 2014 6:19am EST

* Ukraine's hryvnia down 4 percent vs dollar on day

* Russian rouble at five-year dollar low

By Sujata Rao

LONDON, Feb 26 (Reuters) - Ukraine's hryvnia tumbled 4 percent on Wednesday to 10 per dollar as political uncertainty mounted, with ripples spreading to Russia where the rouble fell to five-year lows and bank shares took a hit.

Broader emerging assets also remain under heavy pressure even though a smaller fall in the Chinese yuan than in previous sessions provided some relief.

Ukraine remains without a settled government several days after President Viktor Yanukovich was overthrown, raising fears the country will fail to secure outside financial support in time to repay debts as its own hard currency reserves dwindle.

"The whole political picture in Ukraine has become even more blurred than before," said Simon Quijano-Evans, head of emerging markets research at Commerzbank in London.

"As long as there is no clear resolution on who is in charge and as long as there is no unity among global policymakers on resolving the issues, it is impossible to say what happens to asset prices."

Reflecting the fears, Ukraine's five-year credit default swaps jumped 76 basis points, Markit data showed.

Traders in Kiev said the central bank was absent from the hryvnia market, allowing the national currency to fall to a fresh record low. Year-to-date losses for the once tightly controlled unit are almost 20 percent against the dollar, more than any other major emerging currency in 2014.

Bonds are also falling, with Ukraine's 2017 dollar issue now having erased over half the gains made in a rally on Monday that followed Yanukovich's exit.

"The larger the devaluation, the higher the debt/GDP ratio, bigger hit to the banking sector, and hence higher bank bailout costs," Standard Bank analyst Tim Ash said in a note.

RUSSIA FEELING THE HEAT

The moves are weighing heavily on neighbouring Russia's rouble, which fell half a percent to the dollar and to a record low versus the euro .

Russia holds $3 billion worth of Ukrainian debt issued last December which could end up in default if certain bond covenants are breached. [ID: nIFRh2jP1]

"These Ukraine concerns (are weighing) on the rouble," said Maxim Korovin, fixed income analyst at VTB Capital in Moscow, adding that investors may be betting against the rouble as a way to reduce exposure to the region and so indirectly hedge their Ukraine risk.

"If you short the rouble and the rouble is weakening that will offset your loss," he said.

Shares in Russian banks also fell, with state-controlled VTB and Sberbank down around 1 percent, after ratings agency Fitch warned on Tuesday that banks which lent to Ukraine faced big risks. Russian lenders' exposure was estimated by President Vladimir Putin last year at around $28 billion.

Shares in Hungary's OTP bank, which has operations in Ukraine, fell 0.8 percent while the underlying Budapest exchange was flat.

CHINA

Elsewhere, investor focus remained on the Chinese yuan, which has fallen more than 1.5 percent since mid-January, and weakened below the central bank's official daily fixing for a second day in a row.

Late in the session, it clawed back some of the declines.

Asian currencies gained after the yuan's smaller fall, led by the Korean won while MSCI's emerging equity index rose 0.4 percent after two days of losses as Chinese shares also snapped a four-day losing streak .

"Any fears that the (U.S. Federal Reserve) is going to tighten aggressively has been replaced by what's happening in China," said Neil Shearing, head of emerging markets research at Capital Economics in London.

While some view the Chinese moves as a tacit monetary policy loosening, others reckon they are aimed at preparing the market for more reform and also at stamping out speculative foreign positions in the currency.

The Brazilian real was flat against the dollar before a central bank meeting that could deliver a 50 bps rate rise.

For CENTRAL EUROPE market report, see

For TURKISH market report, see

For RUSSIAN market report, see )

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