Fitch Ratings has downgraded Ukraine's Long-term foreign currency Issuer Default Rating (IDR) to 'CC' from 'CCC', Fitch said in a report.

Fitch also affirmed its local currency IDR at 'CCC'.

The issue ratings on Ukraine's senior unsecured foreign currency bonds have been downgraded to 'CC' from 'CCC', while the senior unsecured local currency bonds have been affirmed at 'CCC'. The Country Ceiling has been affirmed at 'CCC' and the Short-term foreign currency IDR at 'C'.

Fitch said that the new IMF programme announced on February 12, 2015 will help to close Ukraine's financing gap, but an associated restructuring of privately-held external debt appears increasingly probable.

Sovereign creditworthiness has deteriorated. The consolidated fiscal deficit, including losses of state energy company Naftogaz, reached 13% of GDP in 2014. Fitch We estimates that direct and guaranteed debt rose to 72% of GDP in 2014.

"Conflict and economic weakness have led to large additional financing needs beyond those envisaged in Ukraine's IMF programme agreed in April 2014," reads the report.

Fitch said that the escalation of the conflict with rebels in the eastern regions of Donetsk and Luhansk has severely affected the economy.

"We estimate that real GDP fell 7.5% in 20152014, and forecast a further contraction of 5% in 2015, considerably worse than expected at the time of Fitch's last review in August 2014," reads the report.

Fitch said that average inflation this year will grow to 26% from 12.2% a year ago, and next year it will slow to 12%.

The current account deficit narrowed from 9.1% of GDP in 2013 to an estimated 4.1% of GDP in 2014, and will fall further in 2015, Fitch said.

"Banks have been heavily affected by economic turmoil and currency depreciation, and also continue to suffer from the overhang of the 2008-09 crisis. The government has budgeted around 2% of GDP for bank recapitalisation in 2015, but in Fitch's view, the costs will be materially higher, putting further upward pressure on public debt," reads the report.

"Political transition continues following the ousting of former president Viktor Yanukovych in February 2014. The new government formed in December, following parliamentary elections in October, has expressed a strong commitment to undertake structural reforms. However, political risks to the implementation of reforms are high," Fitch said.