Emerging Markets in Troubled Waters

I have just taken a quick walk through some of my favorite econblogs and sources on market information ... and ohh my do we have some wobbles in the markets, particularly the emerging ones.

Particularly Felix Salmon is (albeit with a touch of irony) reporting on bearish sentiments in the markets. First off we need to go to Ecuador where 11 bill. dollars in dollar denominated debt threatenes to make Ecuador default.

(from Bloomberg) 

'The cost of credit-default swaps on Ecuador's government bonds jumped to $475,000 from $362,000 this week, according to prices from Morgan Stanley. The prices are based on five-year contracts that cover $10 million of bonds. Prices for credit- default swaps rise as the perception of a country's ability to repay its debt deteriorates. They fall when the outlook improves.

Debt Negotiation

Ecuador's Palacio yesterday said the country's foreign debt ``absolutely'' needs to be renegotiated, according to a Reuters report. Ecuador, which defaulted on $6.5 billion of debt in 1999, holds about $11 billion in dollar-denominated bonds, of which about $1 billion mature within a year.

The yield on Ecuador's $1.25 billion 12 percent coupon bond due in 2012 jumped to 12.32 percent, the highest in a year.'

Felix even talks about Ecuador pulling an Argentina ...

'If the market won't cooperate with Ecuador, there's little reason for Ecuador to cooperate with the market. Bonds can't be restructured per se: any such operation will have to take the form of an exchange offer. And Argentina has shown that (a) countries, especially ones with large commodity revenues, can operate in default more or less indefinitely; and (b) the more intrasigent and borderline irrational you act, the more of a haircut your creditors will accept.

In other words, no sane Ecuadorean finance minister would try a "market-friendly" restructuring. If you're going to default anyway, it makes a great deal of sense to go all the way and pull an Argentina.'

What about other emerging markets experiencing their credit quality deteriorate by the day ... Hungary for example; In Thailand the new Junta (well this is what it is I guess) is also affecting markets. Lastly, in Poland the Zloty is on a near roller-coaster on the back of speculations of early elections due to a crumbling political coalition. Felix sums up ... (sort of :))

'Never mind gold, buy Polish zloty three-month at-the-money volatility! It's cheap!'

On another note we obviously to all this into perspective ... general trends to watch out or just curves on the wire? Ecuador will certainly be interesting to watch I think. It is diffcult to see anything other than a default here but then again the dollar is falling ;). In terms of central Europe Hungary looks like it will have to do some serious sanitary work in the time to come. In Poland's case I think we are in fact just seing some curves on the wire but this is of course relative and if investors begin to pull out because of a general bearish mood then of course it can a have a more long term impact. In Thailand it obviously all hinges on the current political situation. Thailand has seen a lot of periods like this in history and the extent to which this one is different I cannot say but surely a quick resolution is needed.