Moody’s Downgrades Ukraine as Drawn Out War Raises Debt Risk

(Bloomberg) — Moody’s Investors Service cut Ukraine’s credit rating to the third-lowest level as a more drawn out war than expected increases risks around the nation’s debt sustainability.

Most Read from Bloomberg

The agency downgraded Ukraine by a notch to Caa3, now rating it on par with serial defaulters like Ecuador and Belize. At the Caa3 rating level, Moody’s expects a recovery in the event of default of typically between 65% to 80%, according to a statement published Friday.

“While Ukraine is benefitting from large commitments of international financial support, helping to mitigate immediate liquidity risks, the resulting significant rise in government debt is likely to prove unsustainable over the medium term,” the statement said.

A more protracted war increases the likelihood of a debt restructuring and losses being imposed on private-sector creditors, according to Moody’s. The company also changed the outlook on the country to negative after completing a review process started shortly after Russia’s invasion of Ukraine in February.

Fitch Ratings assigns the country a CCC rating, while S&P Ratings has a B- score on Ukraine.

“This is a natural consequence of the threat that the war places on the macro environment, and consequent ability to service future debt payments,” said Padhraic Garvey, head of global debt and rates strategy at ING Financial Markets. “It should not be cut further. In fact the move could be a rating upgrade from Moody’s down the line should Ukraine get suitable support from the EU, and make a better case that debt servicing is on a surer footing.”

(Updates with S&P, Fitch Ukraine ratings, strategists quotes in the last paragraph)