Emerging-Market Bonds, Currencies Fall on Argentina Concern

Oct. 22 (Bloomberg) — Russia’s ruble, the Korean won and Polish zloty slumped, and developing nation borrowing costs rose to a five-year high, as concern of a second Argentine default in a decade rattled investors in emerging markets.

The ruble, which Russia controls to limit fluctuations, dropped as much as 1 percent, extending a 15 percent decline against the dollar since July, while the zloty and South Korea’s won fell more than 3 percent. Hungary unexpectedly raised its key interest rate to shore up the forint.

Argentine President Cristina Fernandez de Kirchner‘s plan to take control of $29 billion of pension assets roiled markets because the last time the government seized savings was in 2001, before it defaulted on $95 billion of debt and triggered a global selloff. The proposal widened losses in emerging markets, where stocks have tumbled 55 percent this year, compared with 40 percent for developed countries, according to MSCI Indexes.

“Argentina heaps another negative onto an already very delicate global picture,” said Tom Fallon, head of emerging markets at La Francaise des Placements in Paris, which manages $11 billion. “What started not as an emerging market crisis has become one.”

Investors are pulling out of developing countries as a slowdown in economic growth worldwide cuts demand for the commodities they export. The International Monetary Fund forecast global growth will slow to 3 percent in 2009, from 3.9 percent this year, signaling global recession.

Slowing Growth

Russia’s growth will slow to 5.5 percent next year after an estimated 7 percent in 2008, according to the IMF, while Hungary cut its forecast to 1.2 percent from 3 percent last week. The IMF is preparing support to help Iceland, Hungary and Ukraine weather the credit crisis.

“The overwhelming negative sentiment in global markets is worsening,” said Marina Vlasenko, a senior credit analyst at Commerzbank AG in Moscow. “Latin America bonds will suffer first because of their investment in the Argentine economy.”

Argentina, South America’s second-biggest economy, gets more than half its export revenue from wheat, soybeans, corn and other commodities that have been battered by a 40 percent price slump since July. Growth in Argentina will slow to 2.5 percent next year, from an average 8.8 percent expansion over the past five years, according to RBC Capital Markets, a Toronto-based unit of Canada’s largest bank.

Lower export revenue will cause Argentina’s borrowing needs to double next year to as much as $14 billion, RBC said.

“Clearly the deep imbalances in the economy and high dependence on commodity prices continue to keep risks elevated for the 2009-10 period with a hard-landing increasingly likely,” emerging-market analysts at RBC said in a research note today.

`Impossible’ Yields

Stocks in developing countries fell the most since Oct. 16, with the MSCI Emerging Markets Index 4.7 percent lower at 552.88 at 12:37 p.m. in London. Argentina’s Merval Index plunged 11 percent yesterday.

Russia’s Micex Index slid 4.3 percent. An exodus by foreign investors and limited bank lending will drive companies to default on almost a third of ruble-denominated bonds as borrowing costs rise to “impossible” levels, according to the Bank of Moscow. The ruble fell to a two-year low in Moscow.

Russia led declines in emerging-market bonds, with yields widening 103 basis points to 6.73 percentage points more than U.S. Treasury notes, according to JPMorgan Chase & Co.’s EMBI+ index.

The extra yield bondholders demand to buy developing-nation debt rather than U.S. notes rose 26 basis points on average to 7.15 percentage points, the most since March 2003, after widening 42 basis points yesterday, according to JPMorgan.

The Korean won, Asia’s worst performer this year with a 32 percent loss, declined 3.3 percent. The zloty slid 4.1 percent against the dollar and the Turkish lira dropped 3.4 percent.

Default Swaps

Credit-default swaps tied to Argentina’s debt are “already at default levels,” said Fallon at La Francaise. The cost of the contracts protecting bonds against nonpayment were quoted at 31.5 percent, according to CMA Datavision, and reached a record- high of 42.5 percent this week.

The contracts, conceived to protect bondholders against default, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements. An increase indicates a deterioration in the perception of credit quality.

“Changes in the rules of the game and lingering uncertainties on the Argentine economy in the medium term will all limit demand for bonds,” Alejandro Cuadrado, Latin America economist at Merrill Lynch & Co. in New York, wrote in a note to clients today.

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