(Adds fresh quotes, background)
By Natsuko Waki and Sujata Rao
LONDON Feb 25 Ukraine's hryvnia fell to record
lows against the dollar on Tuesday while its dollar bonds
tumbled as concerns grew about the ability of the country to pay
its debts in the near-term.
A rally in Ukraine's dollar bonds that followed the weekend
overthrow of president Viktor Yanukovich is fading quickly as
investors fret over what conditions might be attached to any
rescue package led by the International Monetary Fund.
An aid package involving the IMF typically promotes greater
exchange rate flexibility, a factor that could provide an
additional incentive for the cash-strapped central bank to stand
aside and allow the currency to depreciate.
A floating hryvnia was a key pre-condition set by the IMF in
failed talks with Ukraine last year on renewing its loan deal.
Also adding to the pressure were comments by Russia's Deputy
Finance Minister Sergei Storchak who said there was a small risk
that Ukraine may default on $3 billion in Eurobonds that Russia
recently acquired as part of a $15 billion bailout deal.
Further loans from Russia may be in doubt following the exit
of Moscow-backed Yanukovich.
"People are focusing on reality now ... People are asking
will there be debt restructuring," said Jeremy Brewin, head of
emerging debt at ING Investment Management.
The hryvnia fell more than 6 percent on the day to 9.80 per
dollar, on track for its biggest one-day loss since
Ishitaa Sharma, a strategist at Citi said the hryvnia's
slide was likely to add to jitters among the population, with
many people left holding a depreciating currency.
"They are all looking for hard currency. There is no buyer
out there for the hryvnia," Sharma said.
She added that the government was likely to have to accede
to IMF demands for a flexible currency.
"From the recent willingness of the central bank to let the
hryvnia depreciate, it looks like they should be willing to
accept," she added.
Goldman Sachs estimates the country's reserves have declined
to $12-14 billion. At end-January, the central bank had $17.8
billion in reserves, the lowest level since 2006.
The European Union's foreign policy chief promised Ukraine's
new leaders strong international support, including to fight an
Ukraine's dollar bonds had enjoyed a 7-9 cent rally on
Monday but slipped on Tuesday across all maturities.
The 2017 dollar bond was trading at 93.16
percent of its face value, down 3 percentage points on the day
after rallying more than 10 points on Monday. State energy firm
Naftogaz's dollar bond due Sept 2014 fell a
similar amount, to trade at 90 percent of face value.
Ukraine's dollar bond due June 2014 fell 2
points to 94.6, according to Tradeweb. Other Ukraine dollar
bonds due 2020, 2022 and 2023 fell more than 1 point.
Many of these bonds have been held by big institutional
investors, including Franklin Templeton, according to
"When you get a substantial rally in the (Ukrainian bonds),
you close your eyes and take some chips off the table. That's
what we and many others are doing," said Steve Ellis, a bond
fund manager at Fidelity Worldwide Investments.
(Reporting by Natsuko Waki and Sujata Rao; Editing by Catherine