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Ukraine government bond investors are preparing for next weeks parliamentary elections, which polls show will consolidate power with PresidentPetro Poroshenko, by sending yields to record highs.

Poroshenkos party is leading opinion polls before the Oct. 26 vote with pledges to end an almost seven-month insurgency in eastern Ukraine, revamp the Soviet-era economy and boost ties with the European Union. While he managed to ease tension with Russia, investors have been ruffled by reports from Goldman Sachs Group Inc. and BNP Paribas SA saying they risk losing about a half of their holdings should there be a debt reorganization.

It may seem paradoxical, but the safer and more stable Ukraine gets, the more likely it is to restructure or reschedule its debt, Lutz Roehmeyer, a money manager overseeing $1.1 billion of debt in emerging markets, including Ukraine, at Landesbank Berlin Investment GmbH, said by phone Oct. 20. The depressed bond prices reflect a lack of trust in officials assurances that Ukraine will avoid default.

The countrys bonds have lost 5.1 percent since the government agreed a truce with the pro-Russian rebels Sept. 5, the worst slump after Venezuela and Ecuador in the Bloomberg Dollar Emerging Market Sovereign Bond Index. (BEMS) The yield on the July 2017 note last week reached a record 16.3 percent, before declining to 15.39 percent by 10:10 a.m. in Kiev.

Ukraine, which repaid a $1 billion bond in June and $1.6 billion of state-run gas companys NAK NAftogaz Ukrainys securities this month, isnt considering debt restructuring at all at the moment, Halya Pakhachuk, head of the Finance Ministrys debt department, said by e-mail yesterday. Bringing an end to fighting in the east and policy changes will enable Ukraine to refinance at affordable rates, she said.

The nation, which ousted the regime of the pro-Russian leader Viktor Yanukovych in February after more than three months of protests in Kiev, is grappling with its deepest recession since 2009 as fighting in the east curbs business. The International Monetary Fund is keeping the nation afloat with bailout loans on the condition Ukraine will push on with budget-austerity measures and steps to overhaul ailing banks.

Poroshenko called the early elections in August, saying the current parliament, dominated by lawmakers previously loyal to Yanukovych, cant adopt the needed fiscal and economic changes. His party, the Petro Poroshenko Bloc, would win the ballot with 27 percent of votes, according to a joint survey from Democratic Initiatives and Kyiv International Institute of Sociology published Sept. 26.

The vote may clarify who is in charge, making talks with the EU, U.S. and Russia more effective, according to Simon Quijano-Evans, the London-based head of emerging-market research at Commerzbank AG. Ukraine is set to keep paying debt as not doing so would complicate matters unnecessarily, he said. Commerzbank raised both Ukrainian and Russian Eurobonds to marketweight from underweight in a Sept. 24 client note.

There really is no reason for Ukraine to default on or restructure its external debt, Quijano-Evans said by e-mail two days ago. The country has enough resources at its disposal to service debt well into the third quarter of 2015 and the assumption is that more funds will be on the way.

The nation will need more loans from international lenders than the current $17 billion package, IMF Managing Director Christine Lagarde said on Oct. 9. A week earlier, the World Bank estimated the Ukrainian economy will shrink 8 percent.

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Ukraine Election Carries Peril for Dollar Bondholders