KIEV, Feb. 13 – Prime Minister Yulia Tymoshenko is scambling to find a replacement for Viktor Pynzenyk, who has quit the job of finance minister earlier this week amid disagreement over Ukraine’s widening budget deficit, people familiar with the situation said.

The job offers mounting challenges as Tymosenko refuses to cut budget spending, while Ukraine’s ability to borrow has been further undermined by a credit rating downgrade from Fitch Ratings.

Oleksandr Turchynov, the first deputy prime minister and one of Tymoshenko’s closest allies, is considered for the position among other candidates,

Turchynov, a former head of a budget committee in Parliament, has been in charge of drafting the 2009 budget since November 2008 after Pynzenyk had criticized the draft as unrealistic, the people said.

Other potential candidates considered include Vitaliy Hayduk, Tymoshenko’s energy and industry advisor, who has been widely expected to be appointed as a deputy prime minister.

Serhiy Tyhypko, the head of Swedbank and Tymoshenko’s top aide on foreign investments, has been also mentioned as a possible choice, but analysts said this appointment is less likely.

Tymoshenko said Thursday that a new finance minister will be appointed “in the near future,” adding that Pynzenyk’s resignation was probably caused by his hospitalization earlier this month.

Parliament, which must give its approval to the resignation, as well as to the approval of the new minister, is expected to get together on Tuesday.

Meanwhile, the job offers some mounting challenges as Ukraine’s budget deficit has been widening sharply due to dramatically slowing economy caused by collapse of worldwide demand for steel, the country’s main exports.

The office of President Viktor Yushchenko, which is critical of the Tymoshenko government, estimated the budget deficit was lkelyto expand to 7% of the GDP, compared with 3% approved in the budget.

The office estimated the deficit at more than 70 billion hryvnias and said immediately spending cuts would improve the situation.

Tymoshenko declined to cut spending, arguing that budget revenue was on target this year. She also insisted that the economy was grow 0.4% on the year in 2009, rejecting analysts’ forecasts of up to 10% contraction as a “panic.”

Fitch Ratings downgraded Ukraine's main debt on Friday, citing fears of a full banking and currency crisis and adding to the strains in a country at risk of losing the second slice of an IMF loan.

The downgrading came as economic strains in the country rose, and a day after Pynzenyk resigned saying he had become a "hostage to politics."

The International Monetary Fund (IMF) also warned that "a few issues" required clearing up before it can issue a second slice worth $1.9 billion dollars of a $16.4-billion loan to see Ukraine through the economic crisis.

"Fitch Ratings has today downgraded Ukraine's long-term foreign and local currency issuer default ratings to 'B' from 'B+'," the ratings agency said in a statement.

"This reflects increased risk of a banking and currency crisis in Ukraine, due to intensified stress on the financial system and greater risks to successful implementation of Ukraine's IMF-supported program."

"A full banking and currency crisis would damage the real economy and the sovereign's financing options, directly impairing sovereign creditworthiness," said Fitch.

The ratings agency noted that Ukraine faced a 0.5 billion dollar eurobond maturity in August 2009 plus a possible additional 768 million Swiss Francs (665 US dollars) in September if holders choose to exercise put options.

It predicted that the economy would "contract by 4.5% in 2009, making fiscal tightening more difficult to implement." (tl/ez)