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LONDON, Feb 15 (Reuters) - Ratings agency Moody's put Mongolia on review for a downgrade on Wednesday, citing concerns about the financing of an upcoming $580 million government-backed bond repayment.
The Development Bank of Mongolia's (DBM) bond falls due on March 21, but there are worries that it lacks the funds to make the repayment itself and the government will have to step in.
Ulaanbaatar has been in talks with China and the International Monetary Fund (IMF) for assistance, but investors are concerned that any bailouts might not be negotiated in time.
Moody's said the presence of an "irrevocable and unconditional government guarantee" on the DBM bond meant it would consider a missed payment a default by the Mongolian sovereign which is currently rated Caa1, deep into junk.
"The as yet unresolved issue of how that maturity will be financed poses a near-term threat to Mongolia's credit profile, notwithstanding ongoing discussions with the IMF," Moody's said in a statement.
It added that it would downgrade the rating if it thought actions to support DBM "would damage the Mongolian government's own credit profile and borrowing capacity, including by depleting foreign exchange reserves."
On Wednesday the DBM bond was showing a bid of 97 cents in the dollar, with a yield as high as 34 percent.
The government's own 2021 bond meanwhile lost 0.6 cents to trade at 107.75 cents, while its 2022 issue lost 0.5 cents.
Mongolia, a vast country of just three million people, has been under increasing strain.
Its once booming economy has ground almost to a halt and its currency, the tugrik, lost nearly a quarter of its value against the dollar last year, prompting interest rate hikes and austerity measures.
At the end of last year, it had $1.3 billion of total reserves, including gold and IMF Special Drawing Rights, but is estimated to have $1.7 billion in external debt maturing in 2017, excluding a swap line with the People's Bank of China.
Moody's said it would decide whether or not to cut the rating within three months. It has already cut it twice in less than six months. (Reporting by Claire Milhench and Marc Jones; Editing by Gareth Jones and Ken Ferris)