By Pavel Polityuk and Ilya Zhegulev
KIEV (Reuters) - Ukraine's president called on Tuesday for a full investigation into an arson attack that has raised political tensions in a dispute over the IMF-backed nationalization of the country's largest lender PrivatBank.
PrivatBank was taken into state hands against the wishes of its ex-owner, Ihor Kolomoisky, in 2016 and its fortunes are closely watched by investors because the International Monetary Fund may freeze aid if the nationalization is reversed.
President Volodymyr Zelenskiy, who has longstanding business ties with Kolomoisky, demanded the investigation after the home of a former central banker responsible for nationalizing the bank was torched in a night-time attack.
Zelenskiy in a statement described the fire as "a brutal crime, the rapid investigation of which should be a priority in the work of the law enforcement agencies."
As part of an IMF-supported clean-up of Ukraine's financial system, the authorities nationalized PrivatBank saying the lender had a $5.6 billion hole in its balance sheet due to shady lending practices. Kolomoisky disputed this assessment.
Zelenskiy denies suggestions that he would help Kolomoisky regain control of PrivatBank or win compensation. His new Prime Minister Oleksiy Honcharuk on Tuesday in a text message to Reuters denied an earlier newspaper report about a potential settlement, saying he was not holding talks with Kolomoisky.
But Kolomoisky told Reuters by phone he believed the government was looking for a compromise.
"Honcharuk is the first smart prime minister in recent times. He understands that there must be a compromise," Kolomoisky said. "Otherwise ... I won't leave them alone."
Police have opened a criminal investigation after a property belonging to the family of former Central Bank Governor Valeria Gontareva was burned down. Gontareva did not say who might be responsible for the arson attack.
Ukraine's dollar-denominated bonds fell by as much as 1.6% on the rising tensions over PrivatBank and the arson attack.
Ukraine's central bank said reformers were being intimidated in order to paralyze their activities.
"This is no longer a series of incidents, it is TERROR. Its purpose is to intimidate reformers, past and present, to paralyze our activities, to make us silent. We will not be silent," the central bank said in a written statement.
The U.S. embassy, the European Union and the Group of Seven countries called for an investigation. The opposition party led by former President Petro Poroshenko called the arson attack a signal of Ukraine's deteriorating investment climate.
A video shared with Reuters by Gontareva, who currently lives in London, showed firefighters tackling a massive blaze in her home on the outskirts of Kiev.
NO PRIVATBANK NEGOTIATIONS
Zelenskiy's relationship with Kolomoisky has been under intense scrutiny. The two men met publicly last week but Kolomoisky told reporters that PrivatBank was not discussed.
Honcharuk was quoted by the Financial Times as saying on Tuesday that Zelenskiy wanted a settlement with Kolomoisky, a report which he subsequently denied.
"We are not holding any negotiations," Honcharuk said in a message to Reuters, in response to queries about his comments.
Any hint of the government rowing back on the nationalization would sound alarm bells just as an IMF mission is in town to discuss a new aid-for-reforms deal with the government, which took charge following a snap July election.
The arson attack overnight into Tuesday morning marked the latest in a string of incidents affecting the former central bank governor.
Gontareva believes she is being hounded by Kolomoisky over her decision to nationalize PrivatBank, which the businessman denies.
"The house burned down completely," Gontareva, 54, told Reuters. "I have no strength left to keep going." Earlier this month, a vehicle registered to her daughter-in-law, who shares her exact name, was torched in Kiev.
Kolomoisky denies orchestrating a campaign against Gontareva.
(This story has been reiled to delete duplicated "brutal crime" quote in para 10)
(Reporting by Pavel Polityuk, Polina Ivanova, Mark Hosenball, Matthias Williams and Ilya Zhegulev; Polina Ivanova reported from Moscow and London; Additional reporting by Karin Strohecker in London; Writing by Matthias Williams; Editing by William Maclean and Alistair Bell)