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UPDATE 1-Ukraine hryvnia jumps as central bank drives up short-term rates
December 9, 2013 / 1:51 PM / 4 years ago

UPDATE 1-Ukraine hryvnia jumps as central bank drives up short-term rates

(Updates prices, adds quotes, background, changes slug from previous MARKETS-UKRAINE)

By Carolyn Cohn and Natalia Zinets

LONDON/KIEV, Dec 9 (Reuters) - Ukraine’s hryvnia jumped from four-year lows on Monday as the central bank engineered a sharp rise in short-term interest rates, forcing commercial banks to scramble for the local currency.

The central bank has sold dollars regularly in recent weeks to support the hryvnia’s exchange value, which has been hit by spiralling political unrest. That has drained its hard currency reserves, however, leaving the country at risk of a currency crisis.

With overnight rates - the rates at which banks borrow and lend cash from each other - having jumped to around 20 percent, some banks opted to sell dollars on Monday to meet their daily funding needs, dealers said.

That pushed the hryvnia to six-week highs against the dollar .

Traders said the central bank was trying to “burn out” speculative short positions in the hryvnia, pushing those betting the currency will fall more to close those positions.

“The National Bank fought off the attack by the currency speculators,” said Oleksander Okhrimenko, president of the Ukrainian Analytical Centre in Kiev. “The National Bank carried out dollar-buying intervention and on the other hand it has been withdrawing hryvnia from the system.”

One-week interest rates surged to 18 percent, Reuters data showed, up from 7 percent on Friday, and 3.5 percent a week ago. One-month and three-month money market rates also soared to their highest in a year.

Okhrimenko said the central bank had reacted to the banks’ stampede for hard currency by threatening to suspend banking licenses, effectively forcing them to sell dollars back.

The central bank’s spokeswoman declined to comment. A trader in Kiev said the central bank was carrying out checks on the positions of banks that failed to sell dollars to it.

“The central bank has been intervening but it is becoming more aggressive now,” said Ishitaa Sharma, an emerging markets strategist at Citi in London.

Commerzbank analysts suggested rising short-term rates may also be a consequence of people withdrawing bank deposits.

Ukrainian households, which are estimated to hold over $50 billion in bank deposits, have not yet rushed en masse to withdraw cash, which can earn 14-27 percent interest annually. But there have been some outflows at the margins.

“Banks that saw deposit outflows last week want to create a liquidity cushion. That’s why hryvnia demand has grown,” another trader in Kiev told Reuters.

Ukraine’s central bank said this month it would raise its presence on “all market segments” to ensure they remained in balance. Governor Ihor Sorkin also urged depositors to be confident in the banking sector and not withdraw savings.

The central bank has already stepped up control of the currency market in the past two years.


Despite the latest moves, the hryvnia remains under severe stress in forward markets, which are pricing a sharp devaluation over the next six to 12 months.

The jump in short-term money market rates, if sustained, could also further strain banks that are already grappling with the effects of recession and political turmoil.

Economic activity in Ukraine has been partly paralysed as crowds have demonstrated almost daily against the government’s decision to ditch a landmark pact with the European Union in favour of closer cooperation with Moscow.

The central bank’s reserves of hard currency have meanwhile fallen steadily, with data last week showing a $2 billion fall to $18.9 billion in November, a result of currency market interventions and debt repayments.

That is enough to cover only around two months’ worth of imports and leaves the country highly vulnerable to a currency crisis and potentially even a default on its debt.

While Ukraine’s forward rates are below last week’s elevated levels, non-deliverable forwards are still pricing in an 11 percent currency depreciation over six months and 21 percent in the coming year.

Debt insurance costs are at distressed levels near 1,100 basis points for five-year credit default swaps, according to Markit. That means it costs more than $1 million a year to insure exposure to $10 million of Ukrainian debt over a five-year period.

Few yet expect sovereign default in Ukraine, however. Vladimir Osakovsky, an economist at Bank of America/Merrill Lynch, said external obligations are low in December and early 2014, which could potentially slow the decline in reserves.

Ukraine owes just under $4 billion in gas bills and debt repayments in the first three months of 2014.

“We estimate the critical level of reserves is around $15 billion, so authorities have less than $4 billion now to continue to defend the status quo,” Osakovsky told clients. (Additional reporting and writing by Sujata Rao in London and Douglas Busvine in Moscow; Editing by Hugh Lawson)

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