* Concern about Ukraine sovereign debt knocks euro, equities
* Worries linked to proposed state railway loan restructuring
* Jitters amplified in increasingly risk-averse markets
By Carolyn Cohn
LONDON, Nov 20 (Reuters) - European financial markets were hit by concern over Ukraine's sovereign debts on Friday as the implications of last week's proposed loan restructuring by its state railway jarred with traders already turning wary of risk into the year-end.
Ukraine's finance minister said on Nov. 12 that the state railway was seeking to restructure a $550 million syndicated loan organised by Barclays after failing to repay a portion of it.
Since then, investors and analysts have been examining the implications of the rail debt restructuring on Ukrainian sovereign debt and other quasi-state obligations.
"The company has other external liabilities which have a sovereign guarantee. So the question then (is) are there cross default clauses back between these two separate liabilities and then back to the sovereign?" said Tim Ash, head of CEEMEA research at RBS, in a client note released late on Thursday.
"Will Ukraine default on its sovereign liabilities? Never say never."
Ukraine's state railway was unavailable for comment. Rating agency Fitch said it was not aware of any Ukrainian default on its sovereign debt or any debt with a sovereign guarantee. [ID:nLK668964].
Ukraine's state gas firm Naftogaz defaulted on a $500 million Eurobond in September, restructuring the debt as part of a new $1.595 billion 5-year bond. The newly issued bond that replaced the defaulted paper comes with a sovereign guarantee.
RIPPLES IN WORLD MARKETS
Global equity and emerging markets, which have been surging since March, were jarred by the speculation. Many analysts said that this was at least partly due to yearend profit-taking ahead of the Thanksgiving and Christmas holiday season.
Fund tracker EPFR said on Friday the steady net outflow from "safe" US money market funds -- a move that has been fuelling all markets this year -- slowed to a trickle of less than $1 billion in the last week from weekly outflows in excess of $30 billion just a month ago.
The euro hit a two-week low against the dollar, which tends to benefit in periods of risk aversion, and the Ukraine worries were cited against the background of growing risk aversion. Central European currencies in Hungary, the Czech Republic and Poland also fell, along with European banking stocks, including Commerzbank, Swedbank and Societe Generale.
Although there is no further evidence of Ukraine's debt problems worsening, talk about the issue "is enough to get markets going -- stop losses triggered in CE-3 currencies," a Stockholm-based central European currency dealer said. "The profit-taking scenario was already in the air."
Western banks' exposure to fragile eastern European economies has been a concern throughout the global economic crisis. On Friday, the DJ STOXX European banks were among the top sectoral losers among DJ STOXX 600 shares <.STOXX>.
"It looks to me (like) the general FX market is just waking up to the Ukraine railway loan issue even though first reports about a potential credit event came last week," said Credit Suisse analyst Sergei Voloboev.
"Investors who have been following Ukraine for some time now, would already be aware of underlying risks but could also form a view about the ability of the sovereign to manage its own debt in the short term."
The cost of insuring Ukrainian debt has been rising in recent weeks, after Fitch downgraded the country's sovereign debt rating and the IMF suspended its $16.4 billion standby programme to Ukraine after parliament passed a bill to raise the minimum wage by over 20 percent in defiance of the Fund's recommendations.
Prime Minister Yulia Tymoshenko has warned that the economy will face extreme difficulties without the release of a $3.8 billion IMF loan tranche this month.
Ukraine's five-year credit default swaps rose to levels above 34 percent upfront from about 32 percent on Thursday and 29 percent last week. This means it costs over $3 million upfront to insure $10 million of Ukrainian debt, in addition to annual costs of $500,000 a year.
Ukraine's hryvnia, which is closely managed by the central bank, fell slightly.
(Reporting by Mike Dolan, Carolyn Cohn, Jason Hovet, Peter Apps, Dominic Lau, Walden Siew and Sebastian Tong; Editing by Patrick Graham)