KIEV, Nov. 16 ??“ Ukraine placed a $1 billion 10-year Eurobond on Thursday raising cash that will go to finance growing budget deficit this year after the government has failed to accelerate privatization.

Investors from the U.S., Asia and Europe rushed to buy the paper driving the yield down to an annualized 6.58%, the lowest yield on U.S. dollar-denominated debt issued by Ukraine since 2000.

The latest borrowing, helped by Credit Suisse, Deutsche Bank and UBS, shows that investors have been largely ignoring signs of political instability and were optimistic on Ukraine??™s future economic performance.

???The lowering of the yield means that confidence in Ukraine has been growing thus confirming the quality of reforms and economic progress that has been recently achieved,??? the Finance Ministry said in a statement.

The investor optimism comes despite signs of political instability in Ukraine amid frequent confrontation between President Viktor Yushchenko and Prime Minister Viktor Yanukovych over supremacy in domestic and foreign policies.

Yushchenko has repeatedly threatened to veto the government??™s 2007 budget for its high budget deficit that he believes would require massive borrowing and may fuel inflation.

The Eurobond placement underscores Ukraine??™s return to capital markets in a dramatic reverse of the policy over the past 1.5 years, during which the previous government has been trying to cut debts.

The previous government, led by Prime Minister Yuriy Yekhanurov, has been mostly relying on privatization proceeds, such as selling the country??™s largest steel mill Kryvorizhstal for $4.9 billion to Mittal Steel in October 2005, to finance budget deficits.

This policy, however, changed shortly after Prime Minister Viktor Yanukovych replaced Yekhanurov in August following general election in March.

The Yanukovych government, which had issued a 384 million Swiss franc 12-year Eurobond as soon as in September, argued that greater borrowing was needed to speed up economic growth.

Meanwhile, privatization slowed down as several big companies, such as LuhanskTeplovoz, the largest locomotive manufacturer in the former Soviet Union, had been removed from the list of businesses for sale.

As a result, the government, which originally expected to raise $425 million from selling state assets in 2006, managed to fetch in only 15% of that sum during the first nine months of the year. This put increased pressure on the government to borrow more money to finance $2.6 billion budget deficit this year.

???This comes as privatization revenues have tailed off, and Ukraine has spent the Kryvorizhstal cash, and has increased debt financing needs,??? Timothy Ash, an economist at the Bear Stearns International in London, said.

The government has apparently agreed to pay up to $25 million to Credit Suisse, Deutsche Bank and UBS for helping to arrange the $1 billion borrowing, people familiar with the situation said. (tl/ez)