Developing Nation Yields Soar on Bailouts, Russia Rating Threat
By Laura Cochrane and Denis Maternovsky
Oct. 23 (Bloomberg) -- Developing nations' borrowing costs jumped to a six-year high as Belarus joined governments seeking International Monetary Fund support to weather the credit crisis and Standard & Poor's threatened to cut Russia's debt ratings.
The extra yield investors demand to own emerging-market government bonds instead of U.S. Treasuries rose 62 basis points to 8.64 percentage points, the highest spread since November 2002, according to JPMorgan Chase & Co.'s EMBI+ index. The annual cost to protect Russia's bonds from default soared to 10.5 percent of the debt insured, from 9.5 percent yesterday, according to credit-default swap prices from CMA Datavision.
``There is now no safe haven globally other than a deeply indebted U.S. government,'' said Jim Reid, head of fundamental credit strategy at Deutsche Bank AG in London. ``The events of the last few days are categorical evidence of the globalization of the credit crunch and its subsequent problems.''
Ex-Soviet republic Belarus added to requests from Iceland, Pakistan, Hungary and Ukraine for at least $20 billion of emergency loans as the financial crisis leaves nations unable to repay their debt. Russia has committed as much as 15 percent of its gross domestic product to propping up banks, including a $50 billion credit line to development bank Vnesheconombank, and further bailouts may trigger a downgrade, S&P said today.
Russia's international reserves, the world's third largest, declined by $14.9 billion last week after the central bank sold currency to support the ruble as investors pulled money out of the country.
In Argentina, lawmakers are battling to block President Cristina Fernandez de Kirchner from seizing privately managed pension funds, as the government struggles to avert its second default this decade.
Bond Losses
Emerging-market stocks, bonds and currencies are getting battered as the financial crisis that began with U.S. mortgages last year pushes the global economy toward a recession, crimping demand for the commodities that sustain most developing nations' finances.
Emerging-market bonds have lost 22 percent so far this month, compared with a decline of 15.6 percent for U.S. high- yield debt, Merrill Lynch & Co. indexes show. Stocks in emerging markets have tumbled 59 percent this year, compared with 43 percent for developed countries, according to MSCI Indexes.
Mexico's peso, which has lost nearly a third of its value since August, fell as much as 3 percent to a record low against the U.S. dollar today. Brazil's real dropped by more than 5 percent for a third day after commodity prices slid to the lowest levels in four years.
``It's becoming a mess in emerging markets,'' said New York University professor Nouriel Roubini. ``There are about a dozen emerging markets that are now in severe financial trouble.''
The IMF forecast global growth will slow to 3 percent in 2009, from 3.9 percent this year, meaning a world recession under the fund's informal definition.
Government Bailouts
Belarus applied for a $2 billion loan and may also seek funds from central banks and commercial banks in other countries, news agency Interfax reported yesterday, citing the Belarusian central bank.
Argentina's Fernandez roiled markets yesterday because the last time the government seized retirement savings was in 2001, before it reneged on $95 billion of debt and triggered a global selloff. Argentine stocks had their biggest two-day drop since 1990 and dollar bond yields topped 30 percent.
``If defaults were triggered, even more than the credit sector will get hurt,'' said Esther Law, an emerging-markets strategist in London at Royal Bank of Scotland Plc. ``It would trigger unwinding in credit-default swaps and across currencies and stocks and the thin liquidity would mean extreme movements.''
Vulnerable Nations
The cost to protect debt payments by 14 emerging-market governments from Argentina to Ukraine surged overnight by 3.2 percentage points to 9.9 percent, according to Deutsche Bank prices on the CDX Emerging Markets credit-default swap index. The cost of contracts on Hungary reached 5.8 percent and Croatia rose to 4 percent.
IMF bailout applicants Hungary and Ukraine led declines in Europe's emerging-market stocks to the lowest since 2005. The MSCI Emerging Markets Index of shares fell 4.2 percent to 512.07 at 12.34 a.m. in London, extending the worst monthly decline in at least two decades.
The Budapest Stock Exchange index dropped for a sixth day, declining 3.43 percent to the lowest in five years. Ukraine's PFTS index fell 2.8 percent.
``The threat from the economic slowdown will be greatest in small open economies, those with sizeable external imbalances, and countries with large banking sectors,'' said Ivailo Vesselinov, a senior economist at Dresdner Kleinwort in London. South Korea and Europe's Baltic and Balkan nations are ``particularly vulnerable,'' he said.
Korea, Poland
South Korea's won fell 3.4 percent to the lowest since 1998 on concern demand for the nation's exports is dwindling and the Kospi stock index slumped 7.5 percent. Romania's leu decreased 1.8 percent.
The WIG20 Index in Poland was the worst performing European emerging market benchmark, declining as much as 7.61 percent.
``It isn't necessary for a major economy like Russia or Brazil to fall for there to be severe pressure across the emerging-market universe,'' said Vesselinov.
`Provocations' in Georgia
Russia's Micex stock index dropped the most in a week, falling 5.49 percent. The yield on Russia's 30-year dollar notes increased 34 basis points to 11.32 percent, an all-time high.
Moscow deployed as many as 7,000 soldiers in the separatist region of South Ossetia, leading neighboring Georgia to suspect ``further provocations'' following a five-day war in August, a Georgian Interior Ministry spokesman said today.
Credit-default swaps on OAO Gazprom, Russia's biggest energy company, soared 188 basis points to 15.6 percent and contracts on Sberbank, the biggest bank, increased reached 13.4 percent.
Credit-default swaps protect bondholders against default by paying the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. An increase indicates deterioration in the perception of credit quality.
``There are legitimate reasons to be slightly worried about Russia, but the rise in credit-default swaps have very little to do with the credit risk of Russia and more to do with who holds emerging market debt,'' said Ronald Smith, chief strategist at Moscow-based Alfa Bank. ``Funds are getting redemptions so are having to sell into a weak market, and if they can't sell the equity they may sell the debt as a proxy.''
To contact the reporter on this story: Laura Cochrane in London at [email protected]; Denis Maternovsky in Moscow at [email protected].
Last Updated: October 23, 2008 09:19 EDT
By Laura Cochrane and Denis Maternovsky
Oct. 23 (Bloomberg) -- Developing nations' borrowing costs jumped to a six-year high as Belarus joined governments seeking International Monetary Fund support to weather the credit crisis and Standard & Poor's threatened to cut Russia's debt ratings.
The extra yield investors demand to own emerging-market government bonds instead of U.S. Treasuries rose 62 basis points to 8.64 percentage points, the highest spread since November 2002, according to JPMorgan Chase & Co.'s EMBI+ index. The annual cost to protect Russia's bonds from default soared to 10.5 percent of the debt insured, from 9.5 percent yesterday, according to credit-default swap prices from CMA Datavision.
``There is now no safe haven globally other than a deeply indebted U.S. government,'' said Jim Reid, head of fundamental credit strategy at Deutsche Bank AG in London. ``The events of the last few days are categorical evidence of the globalization of the credit crunch and its subsequent problems.''
Ex-Soviet republic Belarus added to requests from Iceland, Pakistan, Hungary and Ukraine for at least $20 billion of emergency loans as the financial crisis leaves nations unable to repay their debt. Russia has committed as much as 15 percent of its gross domestic product to propping up banks, including a $50 billion credit line to development bank Vnesheconombank, and further bailouts may trigger a downgrade, S&P said today.
Russia's international reserves, the world's third largest, declined by $14.9 billion last week after the central bank sold currency to support the ruble as investors pulled money out of the country.
In Argentina, lawmakers are battling to block President Cristina Fernandez de Kirchner from seizing privately managed pension funds, as the government struggles to avert its second default this decade.
Bond Losses
Emerging-market stocks, bonds and currencies are getting battered as the financial crisis that began with U.S. mortgages last year pushes the global economy toward a recession, crimping demand for the commodities that sustain most developing nations' finances.
Emerging-market bonds have lost 22 percent so far this month, compared with a decline of 15.6 percent for U.S. high- yield debt, Merrill Lynch & Co. indexes show. Stocks in emerging markets have tumbled 59 percent this year, compared with 43 percent for developed countries, according to MSCI Indexes.
Mexico's peso, which has lost nearly a third of its value since August, fell as much as 3 percent to a record low against the U.S. dollar today. Brazil's real dropped by more than 5 percent for a third day after commodity prices slid to the lowest levels in four years.
``It's becoming a mess in emerging markets,'' said New York University professor Nouriel Roubini. ``There are about a dozen emerging markets that are now in severe financial trouble.''
The IMF forecast global growth will slow to 3 percent in 2009, from 3.9 percent this year, meaning a world recession under the fund's informal definition.
Government Bailouts
Belarus applied for a $2 billion loan and may also seek funds from central banks and commercial banks in other countries, news agency Interfax reported yesterday, citing the Belarusian central bank.
Argentina's Fernandez roiled markets yesterday because the last time the government seized retirement savings was in 2001, before it reneged on $95 billion of debt and triggered a global selloff. Argentine stocks had their biggest two-day drop since 1990 and dollar bond yields topped 30 percent.
``If defaults were triggered, even more than the credit sector will get hurt,'' said Esther Law, an emerging-markets strategist in London at Royal Bank of Scotland Plc. ``It would trigger unwinding in credit-default swaps and across currencies and stocks and the thin liquidity would mean extreme movements.''
Vulnerable Nations
The cost to protect debt payments by 14 emerging-market governments from Argentina to Ukraine surged overnight by 3.2 percentage points to 9.9 percent, according to Deutsche Bank prices on the CDX Emerging Markets credit-default swap index. The cost of contracts on Hungary reached 5.8 percent and Croatia rose to 4 percent.
IMF bailout applicants Hungary and Ukraine led declines in Europe's emerging-market stocks to the lowest since 2005. The MSCI Emerging Markets Index of shares fell 4.2 percent to 512.07 at 12.34 a.m. in London, extending the worst monthly decline in at least two decades.
The Budapest Stock Exchange index dropped for a sixth day, declining 3.43 percent to the lowest in five years. Ukraine's PFTS index fell 2.8 percent.
``The threat from the economic slowdown will be greatest in small open economies, those with sizeable external imbalances, and countries with large banking sectors,'' said Ivailo Vesselinov, a senior economist at Dresdner Kleinwort in London. South Korea and Europe's Baltic and Balkan nations are ``particularly vulnerable,'' he said.
Korea, Poland
South Korea's won fell 3.4 percent to the lowest since 1998 on concern demand for the nation's exports is dwindling and the Kospi stock index slumped 7.5 percent. Romania's leu decreased 1.8 percent.
The WIG20 Index in Poland was the worst performing European emerging market benchmark, declining as much as 7.61 percent.
``It isn't necessary for a major economy like Russia or Brazil to fall for there to be severe pressure across the emerging-market universe,'' said Vesselinov.
`Provocations' in Georgia
Russia's Micex stock index dropped the most in a week, falling 5.49 percent. The yield on Russia's 30-year dollar notes increased 34 basis points to 11.32 percent, an all-time high.
Moscow deployed as many as 7,000 soldiers in the separatist region of South Ossetia, leading neighboring Georgia to suspect ``further provocations'' following a five-day war in August, a Georgian Interior Ministry spokesman said today.
Credit-default swaps on OAO Gazprom, Russia's biggest energy company, soared 188 basis points to 15.6 percent and contracts on Sberbank, the biggest bank, increased reached 13.4 percent.
Credit-default swaps protect bondholders against default by paying the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. An increase indicates deterioration in the perception of credit quality.
``There are legitimate reasons to be slightly worried about Russia, but the rise in credit-default swaps have very little to do with the credit risk of Russia and more to do with who holds emerging market debt,'' said Ronald Smith, chief strategist at Moscow-based Alfa Bank. ``Funds are getting redemptions so are having to sell into a weak market, and if they can't sell the equity they may sell the debt as a proxy.''
To contact the reporter on this story: Laura Cochrane in London at [email protected]; Denis Maternovsky in Moscow at [email protected].
Last Updated: October 23, 2008 09:19 EDT
