Feb 28, 2022 - Economy

Ukraine's government bond yields spike, highlighting default risk

Data: Tradeweb; Chart: Axios Visuals
Data: Tradeweb; Chart: Axios Visuals

Ukraine’s government bonds are trading like they’re about to default.

Why it matters: The distressed trading levels are a signal of the real risk of regime change. If Russian occupiers take over the government, the likelihood they’ll make good on Ukraine’s current financial obligations is, at best, unknown.

  • “The big question is, a week from now, who’s going to be in charge? And what does ‘in charge’ mean?” Cathy Hepworth, head of emerging markets debt at PGIM Fixed Income, tells Axios. “We don't know, so it's almost impossible to figure out the ability and willingness” of the government to make payments, she says.

State of play: Many of Ukraine’s bonds lost more than half their value on Thursday, falling to levels as low as the 30 cents on the dollar area — an exceptionally steep one-day drop rarely seen in the bond market. (As bond prices fall, yields go up.)

Where it stands: Absent regime change, Ukrainian President Volodymyr Zelensky’s government still faces financial challenges — but two things had until last week enticed many international investors into funding it.

  • One is Ukraine’s “adequate” foreign exchange reserves, and the other is the expectation for ongoing help from the IMF and other western countries (it’s been getting help for years), Hepworth says.
  • All that could go out the window in a regime-change scenario.

The bottom line: Russia’s military invasion has already caused physical destruction and human suffering in Ukraine. The economic fallout is only just starting to take shape.

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