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Emerging Markets Weekly

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Iceland's central bank unexpectedly raised the benchmark interest rate to 18 percent

Mon, Nov 3 2008, 12:36 GMT
by Erste Bank Bond Research Team

Erste Bank der oesterreichischen Sparkassen AG

EMERGING MARKETS

Emerging-market debt ended stronger Thursday, better bid and buoyed by the Federal Reserve's decision to open dollar swap lines in developing countries. The spread on JPMorgan's Emerging Markets Bond Index Global Diversified was 65 basis points tighter at 737 basis points over Treasurys in late afternoon activity, for a positive return of 1.89%. Brazil's benchmark bond, the Global 2040, gained 11/16 to 113 15/16 bid, according to Reuters. Brazil's spread on JPMorgan's EMBIGD was 41 basis points tighter at 477 basis points over Treasurys, for a positive return of 1.46%. "The swap lines helped," a debt trader in New York said. "People who have been building up cash are dipping in a little," he added. The Fed Wednesday announced additional swap arrangements with central banks in South Korea, Mexico, Brazil and Singapore. The Mexican government said Thursday it plans to buy back as much as 40 billion pesos ($3.2 billion) in medium- and long-term bonds to support liquidity in the local market. It said it will buy back fixed-rate bonds with maturities ranging from 10 to 30 years, denominated in pesos or inflation indexed units known as UDIs. Markets reacted swiftly to the announcement, with Mexico's risk premium on JPMorgan's EMBIGD tightening almost immediately. Mexico's risk premium was recently 43 basis points tighter at 394 basis points over Treasurys, compared with 36 basis points tighter at 301 basis points over Treasurys shortly before announcement. Returns, however, stayed at positive 0.66%, and Mexico's benchmark bond, the 2034, remained at 88 bid, according to Reuters. Meanwhile, Brazil's National Treasury sold fixed-rate LTN bonds with a total face value of 900 million Brazilian reals ($429 million), but was forced to pay higher interest rates as liquidity remains tight in credit markets. Ukraine's debt was recovering from a rocky week. The country's spread on JPMorgan's EMBIGD was 184 basis points tighter at 2079 basis points over Treasurys. Returns were a positive 4.03%.

LATIN AMERICA

Argentina

Argentina's debt ratings were cut by Standard & Poor's for the second time in less than three months amid mounting concern the global financial crisis and a tumble in commodity export prices will lead to default. S&P lowered the South American country's foreign debt rating to B-, six levels below investment grade and in line with countries including Bolivia and Lebanon, from B after cutting it from B+ on Aug. 11. The rating outlook is stable, S&P said. Argentine bonds have plummeted this month, pushing benchmark dollar-denominated yields as high as 30 percent, as the tumble in commodities crimps the country's export receipts and tax revenue. Bond declines deepened last week after President Cristina Fernandez de Kirchner announced plans to nationalize pension funds, a move many investors said is a bid to use the funds' $26 billion to avert the country's second default this decade.
Argentina's private pension funds will propose a series of reforms as an alternative to the government's bid to nationalize the system, newspaper La Nacion quoted a top sector official as saying on Sunday. Sebastian Palla, president of the Union of Argentine Retirement and Pension Administrators business group, will send the government a plan on Monday that envisages more conservative investment and would eliminate commissions during profitless months, the paper said. "All of this was put forward before, at different times," Palla told the paper. "None of it is hugely novel. What we are doing now is grouping (the ideas) together while we urgently discuss this." President Cristina Fernandez's government last month announced a plan to take over Argentina's private pension system, in what was seen as a desperate move to secure funds to head off the specter of a new debt default. Critics say the government wants to use the flow of $4 billion a year in retirement contributions to meet billions of dollars in payments coming due next year. "Today, (private Argentine pension funds) have 10 percent of their members' contributions invested abroad and 55 percent invested in Argentine debt," Palla said. Argentine bonds fell around 60 percent in October. "Let us discuss the composition of these portfolios. The healthiest thing would be to have more diversified risk." The head of Argentina's social security system said last week the government would not liquidate private pensions or use them as a tool to finance debt if Congress approves a bill to nationalize the funds. The move to take over pension funds, which manage around $25 billion in retirement savings, has rocked investor confidence in South America's No. 2 economy. The government on Saturday urged the country's pension funds to fight a U.S. court freeze on about $2.5 billion worth of assets, as holders of defaulted government bonds try to get their money back. On Sunday, the newspaper Pagina 12 reported that the government was considering legal action against the pension funds, and may charge them in court with failing to protect contributors' money in a bid to counter the freeze. A U.S. judge this week ordered the freeze after bondholders argued that the plan to nationalize 10 private pension funds meant the assets managed would become state property and therefore subject to claims by holdouts who rejected a restructuring after Argentina's world-record debt default.

Brazil

Brazilian economic growth may slow to 2.2 percent next year as the U.S. enters a ``strong recession'' and demand from China slackens, according to Bradesco Corretora, the research arm of Brazil's biggest non-state bank. ``The recession in the U.S., as well as deceleration in China and other developing nations, should continue to put negative pressure on the steel, mining and oil sectors' performance,'' economists and analysts wrote in a note to clients.

Chile

President Michelle Bachelet claimed victory after Chileans divided their votes in ballots, handing the opposition a lead in elections for 345 mayors while supporting government candidates for town and city councils. The opposition Alliance for Chile coalition won 40 percent of votes for mayors and control of Santiago's city hall for a third straight time. Bachelet's four-party Concertacion de Partidos por la Democracia won 38 percent.

Colombia

Colombia's consumer prices rose 0.4 percent in October from the previous month. Inflation quickened when compared with a decline in consumer prices of 0.19 percent in September, the national statistics agency said on its Web Site.

Mexico

Mexico's lower house of congress approved measures to give state-owned Petroleos Mexicanos more leeway to hire private and foreign companies. Lawmakers led proceedings at a makeshift stand on the floor of congress after opposition legislators allied with former presidential candidate Andres Manuel Lopez Obrador seized the usual podium, waving Mexican flags and setting off air horns and sirens in a bid to derail the vote. The passage is a political victory for President Felipe Calderon, who overcame two attempts by opponents this year to block congress from voting on the measures, said Jeremy Martin at the Institute of the Americas in La Jolla, California.

Peru

Peruvian inflation accelerated 0.61 percent in October on electricity rates, transport and food prices, the government said. Consumer prices last month rose from 0.57 percent in September, the national statistics agency said.

Venezuela

The same tumbling oil prices that led OPEC to slash output last week threaten to send Venezuela's economy into a tailspin, and put an end to President Hugo Chavez's ambitions to expand his socialist revolution at home and abroad. To cope with plummeting oil revenue, the source of half the government's spending, Chavez may have to cut domestic handouts and foreign aid.

AFRICA & MIDDLE EAST

Egypt

Egypt's President Hosni Mubarak said the global financial crisis will hurt the country's economy, cutting tourist revenue and shrinking imports. ``Egypt expects the crisis to impact imports as well as tourism receipts and the Suez Straits receipts,'' Mubarak told reporters in the courtyard of the French Elysee Palace in Paris. His comments were translated from Arabic.

Ghana

Vendors hawking handbags and fruit along downtown Accra's Liberia Road are busier than the traders five stories upstairs on the Ghana Stock Exchange. An offshore-oil discovery, rising commodity prices and government spending on roads and other projects drove the market to a 64 percent gain this year, making it the world's best- performing bourse. Then volume on the market fell to 23,875 shares daily over the last four weeks, a 20th of the average for the past six months. This left investors unable to flee even as stocks in nearby Nigeria declined 41 percent since March 5. On some days, almost no shares have changed hands in the Cedi House Building. ``It's hard to call it a stock market because of the liquidity levels,'' said Don Elefson, an emergingmarkets specialist at Harding Loevner Management in Somerville, New Jersey. ``Ghana's a little market that gets forgotten.''

Israel

Standard & Poor's on Thursday revised its outlook on Israel's sovereign foreign currency credit rating to stable from positive. The revision reflects the rapid deterioration of the external economic environment, which may slow the decline of government debt at just below 80 percent of GDP in 2008, S&P said in a statement. The change in outlook also reflects the political stalemate that has led to a breakdown of coalition negotiations, preventing any real progress on negotiations with the Palestinian Authority. Key partners for Israel's exportoriented economy, such as the United States and European Union, are sliding into recession, which may be severe and protracted, S&P said.

South Africa

South Africa's private sector credit demand growth braked to a 3-½ year low of 16.42 percent year-on-year in September, below forecasts, adding to signs higher interest rates are cutting spending. Statistics South Africa said on Wednesday credit growth slowed from 18.64 percent in August to its lowest level since early 2005. During the same month, growth in the broadly defined M3 measure of money supply eased to 15.23 percent year-on-year -- a more than 3 year low -- compared to 15.42 percent previously. A Reuters poll had forecast private sector credit growth would slow to 17.4 percent in September, while the annual growth in M3 was seen at 15.21 percent. Analysts said the slowdown may ease some of the concerns about the impact on inflation from a sharply weaker currency.
South Africa's unemployment rate, the highest of 6 countries monitored by Bloomberg, rose to 23.2 percent in the third quarter, suggesting growth in the continent's biggest economy is slowing amid the global financial crisis. The jobless rate climbed from 23.1 percent in the previous quarter, Pretoria-based Statistics South Africa said in its quarterly labor force survey.

Zambia

Zambia's opposition Patriotic Front will launch a court challenge on Tuesday to demand a vote recount after centrist politician Rupiah Banda was sworn in as president on Sunday after a disputed poll. Defeated opposition leader Michael Sata has branded the election to find a successor to the late President Levy Mwanawasa a fraud. Mwanawasa died from a stroke in August, two years into his second five-year presidential term. "They are still preparing certain documents and they will be filing them tomorrow," said Given Lubinda, spokesman for Sata's Patriotic Front said on Monday. The court petition will ask for a recount and the verification of all ballots cast in the election, he said. Zambia has been one of the most politically stable nations in Africa. However, a prolonged election dispute could unsettle investors at a time when Africa's largest copper producer is feeling the pinch from the global financial crisis. Banda -- acting president after Mwanawasa's death -- won 40 percent of the 1.79 million votes cast on Thursday versus 38 percent for Sata, according to final results released by Zambia's electoral commission. A third candidate took the bulk of the remaining votes. The margin of victory was 35,209 votes.

Zimbabwe

Zimbabwe will soon introduce higher denomination banknotes, of up to one million Zimbabwean dollars, in a bid to ease the effects of hyperinflation, the country's central bank said on Monday. The southern African country lopped 10 zeros off the currency on Aug. 1, but it continues to lose value as inflation surges. The government put inflation at 230 million percent for July, the world's highest, although the Washington-based Cato Institute foundation estimates it now at 10.2 quadrillion percent. Currently, the highest denomination banknote is Z$50,000, not enough to buy a loaf of bread, and the central bank plans to introduce Z$100,000, Z$500,000 and Z$1 million (about $8) banknotes in a bid to help consumers battling to make simple purchases. "In the measures underway, the Reserve Bank plans to introduce a number of new, higher denominations; review the cash withdrawal limits, as well as commence aggressive campaigns for increased usage of alternative means of payment," the central bank said in a statement. Zimbabwe's economic crisis -- blamed on President Robert Mugabe's policies -- has worsened amid a stalemate over cabinet positions in a power-sharing government the veteran ruler agreed to form with opposition rival Morgan Tsvangirai on Sept. 15. Analysts say the power-sharing pact offers the best chances of hauling the country out of its worst economic crisis, but hopes of a quick turnaround have been dimmed by a disagreement over key ministerial appointments, which now threatens the deal.

ASIA

China

HSBC Holdings Plc, Citigroup Inc. and other foreign banks in China boosted their profit in the first nine months by 112.7 percent, the nation's banking regulator said. Foreign banks earned a combined 10.1 billion yuan ($1.5 billion) in the period ended Sept. 30, the China Banking Regulatory Commission said in a statement. They expanded loans by 25.4 percent in the period to 786.5 billion yuan, with a non-performing loan ratio of 0.5 percent. Foreign lenders controlled about 2.3 percent of China's 59.3 trillion yuan of assets as of Sept. 30, according to the statement.
China cut interest rates for the third time in two months to stimulate growth in the world's fourth-largest economy after the global financial crisis curbed exports and production. The key one-year lending rate will drop to 6.66 percent from 6.93 percent, the People's Bank of China said on its Web site. The deposit rate will fall to 3.60 percent from 3.87 percent.
China has kept the yuan almost unchanged against the dollar this month while allowing record trade-weighted appreciation, effectively reverting back to the fixed exchange rate it abandoned three years ago.

India

India and China are accelerating efforts to prop up growth as a global slump threatens the world's fastestexpanding major economies. The Reserve Bank of India on Nov. 1 lowered its benchmark interest rate for the second time in two weeks, and for the first time in 11 years reduced the amount of money lenders are required to keep in government bonds. China's central bank removed temporary controls over loans to maintain ``relatively fast'' growth, Xinhua News Agency reported Nov. 1, three days after cutting its key rate for the third time in two months. ``The gathering crisis in more advanced economies is forcing Asian policy makers to jettison assumptions about the health of export sectors,'' said Mark Williams, an international economist at Capital Economics Ltd. in London. ``Interest rates will tumble.''

Pakistan

Moody's Investors Service has lowered the Pakistani government's bond ratings from B2 to B3 and kept the ratings on review for downgrade. In September 2008, Moody's had moved the outlook from stable to negative. "The rating action was prompted by the continuing erosion of the country's external liquidity position, which has remained inadequately addressed by policy adjustments and has suffered from delays in assistance from key bilateral and multilateral creditors," says Aninda Mitra, Moody's sovereign analyst for Pakistan.

South Korea

South Korea said on Monday it plans to pump an extra $11 billion into its economy next year to help soften the impact of the global financial storm, which is beginning to hit exports -- the country's economic lifeblood. The pledge coincided with news of lower-than-expected inflation, which analysts saw as possibly paving the way for another interest rate cut this week after last week's record 75 basis point cut to prop up Asia's fourth largest economy. "The Bank of Korea will likely cut the rates further, at least by 25 basis points this Friday. If not, it may push the financial market into a tailspin again," said Park Jong-youn, fixed-income analyst at Woori Investment & Securities. The promise of more budget spending and tax cuts came just after data showed export growth had fallen to a 13-month low in October, offering stark proof of the damage from the global economic downturn. The pledge also follows last month's more than $130 billion package earmarked by the authorities to shore up the financial sector. "If the current situation continues, the economy is expected to grow by around 3 percent next year. If the global economy shrinks further, it may be difficult to achieve 3 percent growth," Finance Minister Kang Man-soo told reporters.

EMERGING EUROPE & CIS

Poland, the Czech Republic and Slovakia will weather the global financial crisis relatively well but the Baltic republics and Hungary will be hit hard, the European Commission said on Monday. The European Union executive's twice-yearly forecast highlighted growing economic divergences in ex-communist Central and Eastern European states that joined the bloc in 2004-2007, most of which have yet to adopt the euro currency. Presenting the forecast, EU Monetary Affairs Commissioner Joaquin Almunia said the crisis had made joining the euro zone more attractive for Poland and other countries, but noted no state would meet the relevant criteria by spring 2010. "This financial crisis ... has created a new awareness about the risk of not being a member of the euro area. So I look forward for renewed political will to prepare the economies of non-euro area countries for joining the euro area," he said. The Commission slashed economic growth forecasts for Poland, the Czech Republic and Slovakia, but their economies are still expected to expand next year and in 2010 at a healthy pace compared with the euro zone. However, Estonia, Latvia and Lithuania will plunge into recession, accompanied by high inflation and widening budget deficits, complicating their efforts to join the euro zone. Hungary, forced to seek International Monetary Fund and EU help after the crisis hit it hardest among the bloc's members, is expected to expand by 0.7 percent in 2009. But Almunia said his forecast was made before Hungary had announced its latest prediction of a 1.0 percent economic contraction next year.

Baltic States

Standard & Poor's said on Monday it lowered the credit ratings on Lithuania and Latvia, while affirming the ratings on Estonia. The outlook on all three Baltic sovereign is negative. S&P lowered its long- and short-term foreign and local currency ratings on Latvia to "BBB/A-3" from "BBB+/A-2", on expected fiscal deterioration and increased risks the government will have to support domestically owned banks under a worsening credit environment, S&P said in a statement. "The uncertainty surrounding these banks' liquidity needs, refinancing capacity, and worsening credit quality increases the external vulnerabilities of the Latvian economy." S&P's credit analyst Eileen Zhang said. The negative outlook reflects the prospect of a downgrade if the government takes on substantial debt to support one or more banks operating in Latvia, or if a large outflow of funds triggers a balance of payment crisis.

Bulgaria

Ratings agency Standard & Poor's cut Bulgaria's credit rating to BBB from BBB+ with a negative outlook on Thursday, citing worries about external imbalances and economic cooling. "The downgrade reflects our concerns over the sovereign's heightened external vulnerabilities," S&P credit analyst Marko Mrsnik said in a statement.

Croatia

Standard & Poor's Ratings Services revised its outlook on the Republic of Croatia to negative from stable. At the same time, the 'BBB/A-3' foreign currency and 'BBB+/A-2' local currency sovereign credit ratings were affirmed. The Transfer & Convertibility assessment on Croatia remains 'A-'. The outlook on Hrvatska banka za obnovu i razvitak, the sole government-owned specialized development and export finance bank, was also revised to negative, mirroring the sovereign, and the 'BBB/A-3' foreign currency and 'BBB+/A-2' local currency ratings were affirmed. In a related action, the outlook on the City of Zagreb and Zagrebacki Holding d.o.o. was revised from stable to negative, and the 'BBB' long-term ratings were affirmed. The outlook revision reflects risks to Croatia's ability to finance high external imbalances in the present difficult international environment. Croatia's substantial current account deficits have driven up external debt liabilities in recent years, to over 140% of current account receipts in 2007, compared with the 'BBB' median of just under 100%. The risks associated with substantial leveraging and exchange rate exposure of households and corporates increase the vulnerability of the Croatian economy to an interruption in the external credit channel. As a result, the outlook for growth is uncertain, not least due to the relative openness of the Croatian economy, with goods and services exports totaling just under 50% of GDP.

Hungary

Hungary's primary task is to reduce its budget deficit and the country should not expect any special conditions to join the eurozone early, European Economic and Monetary Affairs Commissioner Joaquin Almunia said. Hungary missed earlier opportunities to consolidate its budget and entered the current financial crisis in a difficult position, Almunia told business daily Vilaggazdasag in an interview. So before any economic stimulus is implemented, the budget must be put in order, he said. Almunia also dismissed some suggestions by Hungarian politicians and businessmen that Hungary should be allowed to enter the eurozone without meeting the Maastricht criteria and said Hungary is welcome to join the common currency but only when all conditions are met. Hungary has been one of the hardest hit European nations in the financial crisis but secured the support of the International Monetary Fund, which helped arrange a $25.1 billion rescue package for the county. As part of the deal with the IMF, Hungary agreed to lower the budget deficit to 2.6 percent of gross domestic product next year from an expected 3.4 percent in 2008, in part through painful social spending cuts. Currently, Hungary does not meet any of the Maastricht criteria for eurozone membership and analysts have put the country's accession date around 2013-2014 but have said the planned acceleration in deficit cuts may move that date forward.

Kazakhstan

Kazakhstan will press banks to raise more capital or accept a partial nationalisation offer as it tries to fend off the impact of the global credit crisis, the state regulator said on Monday. The government's proposal to partially nationalise the four biggest banks in Central Asia's top economy is a worry to equity investors, whose stakes will be diluted in the transaction. The four largest Kazakh banks have tentatively agreed to raise their capital by selling stakes to the government, which last week offered the banks a $5 billion aid package. But the transactions have yet to be approved by bank shareholders. Putting more pressure on bank owners to accept the government's offer, the regulator said it would introduce a new capital adequacy ratio, measuring the size of a bank's Tier 1 (core) capital against its risk-weighted assets. "The ratio will probably be 11 percent," FSA Chairwoman Yelena Bakhmutova told reporters in the capital Astana. The new ratio is likely to require banks to seek capital injections should they recognise further asset quality deterioration, which analysts and the regulator say is inevitable in light of deepening financial instability.

Poland

Standard & Poor's revised its credit outlook for Poland down to stable from positive on Monday, citing the deterioration in the international markets and tightening credit conditions. S&P affirmed the "A-" sovereign foreign currency credit rating. Poland is rated "A-" by Fitch Ratings, while Moody's Investors Service holds it one notch higher at "A2". "The outlook revision reflects the adverse impact that we expect the deteriorated international economic and financial environment to have on the Polish economy," Kai Stukenbrock, sovereign credit analyst at S&P, said in a statement. "Slowing external demand, tightening credit conditions and reduced availability and higher cost of external funding will lead to a slowdown in economic activity and increased pressure on private and public sector balance sheets," Stukenbrock wrote.

Romania

Standard & Poor's cut Romania's foreign currency credit rating one notch to "BB+", putting it back at junk status with a negative outlook, citing a lack of policy actions to counter mounting economic risks from overly high credit leverage. "The downgrade reflects the mounting risks to Romania's real economy due to high and rising private sector leverage and the related dependency on an increasingly uncertain external financing channel," Marko Mrsnik, sovereign credit analyst at S&P, said in a statement. "Policy-makers have not addressed these growing economic challenges, as the focus has shifted to the upcoming general election, which has intensified the generally antagonistic and uncooperative political environment," Mrsnik said.
Romania's deputy central bank head Cristian Popa on Tuesday, criticised a Standard & Poor's downgrade of Romania to below investment grade as "unwarranted," and said the country's access to financing did not show "obvious" problems. Below are Popa's comments made in a meeting with reporters: "I think it was unwarranted. Looking at the positives and the negatives of the Romanian economy, it is less risky than other economies in its peer group." "The positives of Romania (are) low public debt, low credit-to-GDP (ratio), a slowdown in credit growth, short-term debt (growth being) much slower than long-term debt for the private sector, high reserves as (compared to) debt, (high) reserve requirements that could be used in a managed fashion to release liquidity and help banks in their effort to maintain business." "They say we have a very high vulnerability because of the current account deficit ... It is true, but I remind you that a correction (in the current account deficit) has already started."
The Romanian central bank's hard currency reserves, excluding 103.7 tonnes of gold, rose 1.3 billion euros ($1.67 billion) on the month to 27.3 billion euros in October, central bank data showed on Monday. Inflows were 4.4 billion euros, coming mainly from changes in the minimum reserve requirement on hard currency liabilities for commercial banks, transactions on the interbank market and funds deposited in the European Commission account. Outflows totalled 3.1 billion euros, largely reflecting interbank transactions, payments to service Romania's public external debt and changes in the minimum reserve requirement.

Russia

Russia's international reserves dropped $31 billion last week, the biggest decline this year, as the central bank struggled to prop up the nation's currency and a banking system under threat from the global financial crisis. The reserves fell to $484.7 billion, the lowest since the end of January, after dropping for four consecutive weeks, the Moscow-based central bank said in an e-mailed statement. The slump is the longest since Bank Rossii switched methodologies this year to calculate the reserves. ``Its a very bad number,'' said Natalia Orlova, the chief economist at Alfa Bank in Moscow. ``It's a signal that companies have started to not trust the ruble.''

Turkey

The European Bank for Reconstruction and Development plans to provide Turkey with $600 million of investment by the end of 2010, it said on Tuesday after its board accepted the country as a recipient. The bank said investments would focus outside the main metropolitan areas, aiming on further developing Turkey's private sector and targeting small and medium-sized companies under particular pressure from global and local market turmoil. "A dynamic market economy in Turkey will benefit not only the people of Turkey but also help strengthen other economies in the EBRD region given the country's economic importance," EBRD President Thomas Mirow said in a statement. "Such a move to help secure a sustainable economic future for the countries in our region is all the more important now at this time of global economic uncertainty."
The World Bank expects Turkish banks' non-performing loans rate to rise from 3.5 percent now as the global credit crunch hits its corporate sector, Country Director Ulrich Zachau said on Tuesday. Zachau told Reuters in an interview he expected Turkish economic growth to fall substantially in the second half of 2008 and next year compared to previous years' and added that a 4-percent growth projection for 2009 was optimistic. "As the credit crunch affects the private sector in Turkey, corporate businesses and especially small- and medium-sized businesses, we would expect non-performing loan ratios to go up somewhat, but they are still low," Zachau said.

Ukraine

Standard & Poor's lowered its long- term credit rating for three Ukrainian banks and set their outlook as negative because of ``increased pressure on the banks' asset quality''. UniCredit's Ukrsotsbank, Ukraine's fourth biggest bank by assets, Alfa-Bank Ukraine, the 10th biggest bank by assets, and PKO Bank Polski SA's VAT Kredobank had their credit rating cut from `B+' to `B' by S&P on ``the rising cost to the Ukrainian government of a necessary recapitalization of the banking sector'' and ``heightened exchange rate risk,'' Standard & Poor's credit analyst Annette Ess said in an e-mailed statement.
Ukrainian politicians have been unable to agree on much of anything since the country rejected its Soviet past in the 2004 Orange Revolution. Their squabbling now may lead to a currency devaluation and more capital flight. Parliament took more than a week to pass legislation on Oct. 31 accepting the initial terms of a $16.5 billion International Monetary Fund loan, as a tumbling currency and $100 billion in debt to be repaid next year threaten the economy and the financial system. Still to be debated are the final belt- tightening measures required by the IMF. President Viktor Yushchenko has called an early election to face off against pro-Russian Viktor Yanukovych, who initially claimed victory in the rigged 2004 presidential election that led to the Orange Revolution, and his own prime minister, Yulia Timoshenko. Yet he can't fix a date because Timoshenko doesn't want to. Her party has prevented lawmakers from voting on a date by physically barring access to the chamber. ``Instead of uniting to save the country, they're falling apart,'' said Ariel Cohen, a political analyst at the Heritage Foundation, speaking of Yushchenko and Timoshenko by telephone from Washington. `` The IMF threw them a lifeline. Instead of grabbing it, they're pushing each other away from it, so everyone sinks.'' Ukraine needs the money because much of its debt is in dollars. As the currency, the hryvnia, falls, the cost of repaying the debt rises. Yushchenko puts the value of debt due to be repaid next year at about $80 billion in corporate debt and about $20 billion that is owed by the state.

INDUSTRIAL COUNTRIES

Iceland

Iceland's central bank unexpectedly raised the benchmark interest rate to 18 percent, the highest in at least seven years, after the island reached an aid agreement with the International Monetary Fund.
Iceland's ruling party, struggling to cope with a meltdown of the island's economy, is losing support from voters, according to a poll published in the daily Morgunbladid on Sunday. Prime Minister Geir Haarde's Independence Party, in power for 17 years, polled 22.3 percent in the survey by Gallup. Its coalition partner, the Social Democratic Alliance, registered at 36.9 percent. The prime minister has said the collapse of the banking system could eat up as much as 1.1 trillion crowns ($9.15 billion), or 85 percent of 2007 gross domestic product. In a Gallup/Morgunbladid poll a month ago, the Independence Party had 28.4 percent, the Social Democratic Alliance 31.2 percent and the main opposition party, the Left Greens 25.3 percent. In the most recent survey, the opposition Left Greens polled 26.9 percent. In the survey, pollsters asked 1,200 voters aged 18-75 between Oct. 27-29 October which party they would vote for if elections were held today. A national vote in 2007 gave the Independents 36.6 percent, the Social Democratic Alliance 26.8 percent, the Left Greens 14.3 percent, the Progressives 11.7 percent and the Liberals 7.3 percent, according to figures published on the National Electoral Commission's website. The next parliamentary election is scheduled for 2011. The poll also showed that 60.6 percent of the population want an early vote. On Saturday, 1,000 people marched through central Reykjavik and joined a rally in front of the Althing Building -- Iceland's parliament -- demanding a new vote, the resignation of the cabinet and the dismissal of the central bank's governing board. This was the third Saturday rally in as many weeks. Organisers of the rally told state television they plan similar demonstrations every Saturday until their demands had been met. In response to a question about Iceland adopting the Euro, nearly 80 percent were in favour while 20 percent were against.

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Published on  Mon, Nov 3 2008, 12:50 GMT