People queue outside a PrivatBank branch in Ukraine. Viktor Drachev | AFP | Getty Images

Ukraine took over its largest bank on Monday in a move backed by Kiev's international donors to protect the country's financial system and accompanied by an appeal for calm and assurances to depositors from President Petro Poroshenko. In one of the biggest shake-ups of the war-torn country's banking system since Ukraine plunged into economic and political turmoil more than two years ago, the central bank said that PrivatBank had not fulfilled its recapitalisation programme.

People queue outside a PrivatBank branch in Ukraine. Viktor Drachev | AFP | Getty Images

Risky lending practices had left a capital shortfall of around $5.65 billion on PrivatBank's balance sheet as of Dec 1, while some 97 percent of its corporate loans had gone to companies linked to its shareholders, it said in a statement.

PrivatBank is the jewel in the crown of the business empire of Ihor Kolomoisky, a powerful tycoon who was locked in a protracted tussle with Poroshenko last year. Rescuing it — which the finance minister said would require a minimum of $4.5 billion from the budget — could help unlock more aid from the International Monetary Fund next year but could also threaten more instability. Opposition parties have repeatedly called for snap elections to unseat the pro-Western leadership that took power after the 2014 Maidan protests. They have harnessed the anger of depositors of banks previously shut down in a sweeping clean-up of the financial system, demanding the central bank chief's resignation. Poroshenko urged the bank's more than 20 million clients to "stay calm" and said that he had submitted a draft amendment to parliament aimed at giving additional protection to depositors.

The leader of the opposition Radical Party Oleh Lyashko blamed PrivatBank's problems on the central bank, saying "Ukrainians have to pay from their pockets for these mistakes."

Another opposition lawmaker called it the "greatest robbery of Ukraine's state budget of the millennium". "We are sure that moving the bank into state ownership is the only possible way to save the money of the bank's clients and to save the financial system," the central bank said. Under Western-backed banking reforms, Ukraine is meant to shut lenders that cannot meet capitalisation targets, but PrivatBank is considered too big to fail. The announcement comes just days before parliament has to vote on next year's budget, which must stick to a shortfall of 3 percent of economic output, as agreed with Ukraine's international backers. "The adoption of the budget will be the indicator. If the budget is approved this week without problems it means the situation is under control of the president and government," political analyst Volodymyr Fesenko said.

Fiscal burden

Ukraine's dollar-denominated bonds jumped by more than 1 cent, while the hryvnia was at its lowest level since mid-September. "It seemed quite clear...that the government had to do something, so this probably comes as a relief, especially if we see positive comments from the IMF," said Simon Quijano-Evans, Emerging Markets Strategist, Legal & General Investment Management. "Markets will be focused on how much capital is required from the state and how much can be obtained from the original owners in order to reduce the fiscal burden."