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Hasenstab bet on with $5 B Ukraine Debt

Dr Michael Hasenstab, the architect of Franklin Templeton’s massive purchase of Irish debt, is now ‘betting’ Ukrainian international debt of $5 B (or about 20% of the country’s outstanding international government bonds) at the end of August 2013.

Dr Hasenstab’s bet on Irish has so far paid off handsomely.  However, this time – Ukrainian move is potentially even riskier as the country is struggling with a weak economy, a large budget deficit and a current account deficit that is rapidly eroding the central bank’s currency reserves to mere months of import cover.

The cost of insuring against a Ukrainian default is among the highest in the world, and most analysts and investors expect it is only a matter of time before Ukraine either succumbs to an International Monetary Fund programme, a Russian rescue package or crashes altogether.

The good news is that there is a high probability that Ukrainian will be signing a free-trade agreement with the EU later this month and could help pave the way for an IMF deal and in the longer run provide a fillip to the economy.

The bad news is – in the short term, Ukraine’s future looks uncertain.  Fitch cut Ukraine’s grade to B minus on Friday (2013-11-08), deep in “junk” territory, and warned that the outlook was still negative.  The benchmark 10-year Ukrainian bond yield, rose to close to 10%, on Friday’s evening.

Franklin Templeton has held most of its Ukrainian bonds for some time, but Dr Hasenstab increased its exposure even further this summer, buying $171m of a big bond due in 2023.

Reference

Financial Times, Robin Wigglesworth & Roman Olearchyk, 2013-11-10, “Franklin Templeton Takes $5 Bn Ukraine Debt Gamble”