KIEV, Nov. 21 - Ukraine plans to borrow more money internationally this year as the government faces greater problems financing its budget, financial industry sources reported Tuesday.

Ukraine has been apparently seeking to issue a Swiss franc(CHF)-denominated debt before the end of the year, the sources reported.

The report comes just days after Ukraine borrowed $1 billion through issuance of a 10-year U.S. dollar-denominated eurobond, underscoring the urgency that the government faces.

"This demonstrates that the sovereign is facing increased budget financing needs, reflecting the shortfall in privatization and domestic borrowing,"
Timothy Ash, an analyst with Bear Stearns International in London, said. "We expect more to come in 2007."

The $1 billion eurobond placement was helped by Credit Suisse, Deutsche Bank and UBS. 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 issue of the eurobond highlighted Ukraine's return to capital markets in a dramatic reverse of policy over the past 1.5 years, during which the previous government had been trying to cut debts.

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

But this policy was changed Viktor Yanukovych, who replaced Yekhanurov in early August following an election in March.

The Yanukovych government issued a CHF384 million 12-year eurobond in September, one month after coming to power, arguing that greater borrowing was needed to speed up economic growth.

Meanwhile, the Yanukovych government moved to slow down privatization. The government removed several big companies, such as LuhanskTeplovoz, the largest locomotive manufacturer in the former Soviet Union, from the list of privatization this year.

As a result, the government, which originally expected to raise $425 million from selling state assets in 2006, managed to fetch 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 a $2.6 billion budget deficit this year. (nr/ez)