James Marson in Kyiv -

"The situation in Ukraine is the worst in the world... The country is in danger. Its citizens are in danger." This is the analysis of Ukraine's economy in a memo allegedly written by Viktor Pynzenyk, Ukraine's now ex-finance minister after he resigned in February, which was posted on a respected news website at the end of January.

Amid the political war in the country between President Viktor Yushchenko and Prime Minister Yulia Tymoshenko, who seem more preoccupied with mudslinging than policy-making, a UN report in January placed Ukraine as the country most likely to default on its debts.

But analysts believe any fear of a sovereign default is exaggerated. "Ukraine will be able to refinance or repay its debts," argues Vitaliy Vavryshchuk, a banking analyst at Dragon Capital. With a relatively small sum of around $1.6bn of external government debt to service in 2009, the bigger concern is corporate debt.

Banking sector debt maturing in 2009 is estimated at $17bn and other corporates' debt at $8.5bn (excluding trade loans), but Dragon Capital believes this to be manageable and expects 75% to be rolled over. "There is no systemic problem with corporate loans," Vavryshchuk says. "Some companies will default, but most will be able to pay."

Even so Ukraine is far from out of the woods and risks remain. "We remain somewhat more constructive on the risks of a sovereign default, albeit accept that short-term news flow could well continue to have a negative bias," says Timothy Ash, head of emerging market research at the Royal Bank of Scotland.

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