FRANKFURT, April 7 - Moody's Investors Service has downgraded Ukraine's government bond rating to Caa3 from Caa2. The outlook on the Caa3 rating is negative, Moody's says.

The downgrade is driven by the following three factors, which exacerbate Ukraine's more longstanding economic and fiscal fragility:

1.) The escalation of Ukraine's political crisis, as reflected by the recent regime change in Kiev as well as the annexation of Crimea by Russia (Baa1, on review for downgrade).

2.) Ukraine's stressed external liquidity position, in light of a continued decline in foreign-currency reserves, the withdrawal of Russian financial support and a rise in gas import prices. This assessment accounts for the near-term liquidity relief that the recently agreed IMF staff-level agreement will provide.

3.) The decline in Ukraine's fiscal strength, with an expected increase in the debt-to-GDP ratio to 55%-60% by the end of 2014 (from 40.5% at year-end 2013) due to a sizable fiscal deficit, a significant GDP contraction (by 5-10%) and a sharp currency depreciation.