Fitch Ratings has downgraded Ukraine's Long-Term Foreign-Currency (LTFC) Issuer Default Rating (IDR) to 'C' from 'CCC'.

The Ukrainian government formally launched a consent solicitation to postpone external debt repayments for 24 months on July 20. Fitch described the transaction as the start of a distressed debt exchange (DDE) process, which is consistent with ratings of 'C' for both the LTFC IDR and the affected securities.

Moreover, Fitch analysts believe that a broader restructuring of the government's commercial debt will be necessary, though the timing is uncertain. As a result of the war with Russia, Ukraine's macro-financial position, public finances, and external finances have been severely stressed.

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The Ukrainian Cabinet of Ministers decided on July 20 to seek a two-day delay in external debt payments. In order for the agreement to take effect, the Kiev government must reach new terms with the debt holders. Ukraine's international creditors, which include the United Kingdom, Canada, France, Germany, Japan, and the United States, supported Kiev's request to postpone debt repayments until the end of 2023. The group also urged Ukraine's private-sector bondholders to follow suit.

Ukraine faces a $1.4 billion redemption and interest payments on September 1, according to Bloomberg's estimates.

Ukraine crisis to affect Eurozone 

The Ukraine crisis and the West's sanctions on Russia will pose fiscal and growth challenges to the sovereign credit status of eurozone states that would not be unlike the COVID-19 pandemic, Fitch Ratings said in March. 

The credit rating agency said that the impact and design of the policy responses to the crisis will be important in assessing the sovereign credit impact. "Like the pandemic, the war is an external shock that will be felt across the bloc and its impact will vary, for example with dependency on Russian gas, or trade linkages." 

One particular sting for eurozone states will come from the increased imports of liquefied natural gas, in addition to other infrastructure, to replace Russian energy supplies, which these states are planning to phase out over the coming five years.