IMF, Ukraine Reach Agreement on $16.5 Billion Loan

By Daryna Krasnolutska and John Martens

Oct. 26 (Bloomberg) -- The International Monetary Fund reached agreement with Ukraine on a $16.5 billion loan to help support the nation's financial system as turmoil in global credit markets and recession concerns sweep eastern Europe.

The 24-month loan is conditional on parliamentary approval of legislation to support the country's banks, the Washington- based lender said today in a statement. Ukraine also will need to balance its budget by reining in social spending and narrow the current-account deficit, the Kiev-based central bank said in a separate statement.

Eastern Europe is being buffeted by the global credit crunch as investors stung by losses in developed nations sell riskier emerging-markets stocks, bonds and currencies. Ukraine is the first nation in the region to receive IMF help during the crisis. Belarus this past week joined Iceland, Pakistan, Hungary and Ukraine in requesting at least $20 billion of emergency loans from the IMF to help repay debt.

``The money is only half of the issue, conditionality is key,'' Timothy Ash, head of emerging-market research at Royal Bank of Scotland Group Plc in London, said in a telephone interview. ``We hope the Fund is maintaining its push for a more flexible exchange rate, far-reaching reforms in the banking sector and more privatization.''

Banks

President Viktor Yushchenko faces an economic meltdown as prices for the nation's main exports, including steel, drop and a weakening currency makes goods purchased abroad more costly. He has urged the cabinet to raise custom duties to curb imports and help domestic producers boost exports to counter the widening trade gap.

Ukraine agreed to set up a fund that will buy stakes in the nation's banks and pass legislation that forces lenders to halt dividend payments to retain capital, central bank official Serhiy Kruhlik said in a telephone interview in Kiev today.

The central bank took control of closely held Prominvestbank on Oct. 7 and promised an injection of 5 billion hryvnia ($830 million) to bail out Ukraine's sixth-biggest bank by assets after a run by depositors.

The government also plans to raise the state guarantee on bank deposits to 100,000 hryvnia from 50,000 now and will use proceeds from privatizations and bond sales for the bank bailout fund, according to Kruhlik. The parliament is scheduled to vote on the amended legislation on Oct. 28.

`No Consensus'

``As of now, there is no consensus between Ukrainian political forces about a stabilization program,'' said Svitlana Maslova, an analyst at Barclays Capital in London. Investors ``will closely look at the details of the policy package to assess the impact of the program.''

Industrial production contracted 4.5 percent from a year earlier in September and the trade gap widened to a record $12.5 billion in the eight months through August.

Ukraine's current-account deficit may widen to $15 billion this year, central bank governor Volodymyr Stelmakh said earlier this month. The current-account gap was $7.5 billion, or about 6 percent of gross domestic product, in the first eight months of the year.

The former Soviet republic's currency tumbled 13 percent last week and touched a record 6.0812 per dollar on Oct. 24. the lowest since the hryvnia was introduced in 1996. Ukraine's annual inflation rate almost tripled to a record 31.1 percent in May before easing back to 24.6 percent in September.

Elections

Ukraine is the least creditworthy of Europe's transition economies measured by the cost of credit-default swaps, conceived to protect bondholders against default. Its economic predicament is complicated by a political crisis that led to collapse of the government and calling of early elections.

Yushchenko dissolved the parliament on Oct. 8 and a new one will be chosen on Dec. 14, the second national elections in as many years. His party, which seeks closer ties with the European Union and the North Atlantic Treaty Organization, quit the coalition on Sept. 3 after former ally, Prime Minister Yulia Timoshenko, joined with the pro-Russian opposition to strip the president of some powers.

Yushchenko and Timoshenko joined forces to win the 2004 election after the bloodless Orange Revolution on promises to move the country toward the West. After a split in 2005, the two reunited before last year's elections.

Since then, Yushchenko and Timoshenko have been locked in a battle over how to tackle Europe's fastest inflation rate, sell state assets and how to spend budget funds.

To contact the reporter on this story: Daryna Krasnolutska in Kiev at dkrasnolutsk@bloomberg.net; John Martens in Brussels at jmartens1@bloomberg.net