ASTANA (Reuters) - Ukraine will probably default on its international debts if it loses more territory, ratings agency Standard & Poors warned on Saturday, noting its existing CCC rating on the country already indicated a clear and present danger of default.
"If Ukraine loses some of its territorial integrity, it will not likely be able to repay the loans," John Chambers, chairman of the Standard & Poor's Sovereign Ratings Committee, told Reuters in the Kazakh capital Astana.
Russia has already annexed Ukraine's Crimea region and tensions are rising in other parts of the country. At least 42 people were killed in street battles between supporters and opponents of Russia in the Black Sea port city of Odessa on Friday, that ended with pro-Russian protesters trapped in a flaming building.
"Ukraine came into the crisis with a moderate government debt burden at the existing exchange rate. But obviously, if the exchange rate collapses and they lose additional parts of their territory, their ability to service their debt will be jeopardized," Chambers said.
S&P in February cut Ukraine's long-term foreign currency rating to CCC with a negative outlook, noting even then the political situation had deteriorated substantially and seeing a clear risk of default.
The International Monetary Fund this week signed off on a $17 billion (10.07 billion pounds) two-year aid programme for Ukraine to help the economy recover after months of turmoil. But it warned that any loss of territory in the east would likely require additional financing.
The IMF also said a deterioration in relations between Ukraine and Russia, a key export market for Kiev, could further hurt Ukraine's economy.
The first IMF disbursement of $3.2 billion to Kiev will help it meet immediate payments. It faces a series of other repayments this year, but has also lined up funds including $2.7 billion from the European Union, of which it expects up to $1 billion this month.
Despite Ukraine's current upheaval, the leadership in Kiev which was installed in February wants to conduct a nationwide presidential election on May 25. Meanwhile its economy is set to shrink this year.
"Whatever projections anyone makes, they will be determined by a political scenario," Chambers said. "So, if you can have a smooth election and maintain the territorial integrity of Ukraine ex-Crimea, it’s going to give you a much better outcome than if this problem festers ... Things have deteriorated in the past few days.
"It's probably too early to discuss a divided Ukraine", he added, noting that besides an industrial base in the east the country has industry in other parts, as well as strong agricultural output, while "its human capital is as good as in any other country in the region".
"But, clearly, if you are in a period of high political instability, it diminishes your ability to service your debt or to deliver governmental services in general."
(Editing by David Holmes)