KIEV, Oct. 29 – The hryvnia plummeted against the U.S. dollar Wednesday after Volodymyr Stelmakh, the governor of the National Bank of Ukraine, admitted that failure to secure a loan from the International Monetary Fund may trigger default on debts.

The hryvnia plunged to 7.20 to the dollar in trading between commercial banks on Wednesday, compared with 6.30/dollar on Tuesday, the worst decline since the financial meltdown in September 1998. The hryvnia traded at 4.85 to the dollar a month ago.

The plunge comes after Stelmkah unexpectedly admitted on Wednesday that the failure to secure a $16.5 billion emergency loan from the IMF may trigger default on foreign debts by Ukraine.

Without the loan, “we will not be able to show our creditors that we have a reliable mechanism to repay our debts,” Stelmakh said at a press conference. “We will discredit ourselves and thus may have to announce default.”

The announcement, which sent shockwaves through markets, is a turnaround in NBU’s previous assurances that the country has enough cash to repay the debts and to save the country’s currency.

Parliament, after two days of talks between political leaders, on Wednesday approved an economic rescue legislation, which is the first step towards obtaining the IMF loan.

The NBU currently has about $34 billion in forex reserves, while Ukraine’s overall foreign debts are reported at $100 billion, of which $15 billion is a state debt and $85 billion corporate debt.

But Stelmkah’s comment and the urgency of the IMF rescue package, which was negotiated within 10 days, triggered speculations the NBU may not have access to all of its reserves that had been apparently invested in undisclosed securities.

“The NBU probably has enough reserves to support the hryvnia during the next two weeks, not more,” one currency analyst said citing a source. “At least two thirds of the reserves were invested in U.S. securities and cannot be used for the interventions.”

The NBU declined to comment.

But one NBU official admitted some of the bank’s reserves had been indeed invested in undisclosed U.S. securities, but assured those were not related to subprime mortgages, the toxic assets whose value had plummeted over the past several months causing the world’s worst financial crisis since 1929.

Reacting to the hryvnias rapid plunge on Wednesday, the NBU intervened by selling dollars at the rate of 5.70 hryvnias to the dollar, helping the hryvnia to close at 5.70/dollar on Wednesday, compared with 5.50/dollar on Tuesday.

The developments come two days after the NBU has scrapped its currency trading band of 4.60 to 5.40 to the dollar that was supposed to be in effect through the end of 2008, opening the way for aggressive depreciation.

The NBU, at an emergency meeting on Monday, adopted a new – much wider – currency trading band, but had refused to disclose its parameters amid fears the announcement would trigger panic.

The NBU’s policy switch is aimed at bringing the hryvnia’s value – now controlled by the central bank - closer to real market exchange rates that currently exceed 6.0 hryvnias to the dollar.

Stelmakh said Wednesday he did not expect that the hryvnia to be any stronger than 6.0 to the dollar by the end of the year.

“I think the exchange rate will not be less than 6 [hryvnias per dollar],” Stelmakh said.

Meanwhile, Prime Minister Yulia Tymoshenko, seeking to distance herself from the potential currency problems, on Wednesday demanded that Stelmakh must report to Parliament over steep exchange rate fluctuations.

“The Rada must listen to the leadership of the NBU over what has been happening with the exchange rate and what are the reasons for that,” Tymoshenko said.

“As the government we are not accepting such position of the NBU and demand to use reserves of the NBU to stabilize the exchange rate as is being done in the whole world,” Tymoshenko said. (tl/ez)