Eurozone fears hit emerging markets

2011-09-14 13:58

London - A ratings downgrade for two of France's largest banks kept the eurozone debt crisis on the boil, knocking emerging markets lower on Wednesday even as the world's four biggest developing economies discussed stepping up support for the beleaguered single currency bloc.

The sharpest currency and equity losses were seen in the Asian session while Hungary's forint skidded to a new one-year low to the euro, pressured by a controversial state plan to help foreign currency mortgage holders.

The ratings downgrade suffered by Credit Agricole and Societe Generale over their exposure to Greek debt dealt a fresh blow to efforts by eurozone leaders to restore investor confidence in the region, and helped fuel a broad sell-off in the Asian session.

The Indonesian rupiah, the Indian rupee and the Malaysian ringgit were among those that sank to fresh multi-month lows against the dollar.

South Korean shares - one of the biggest components of the MSCI Emerging Markets Index - ended 3.5% lower, catching up with recent global losses on the first trading session after being closed for two days.

The benchmark index slipped 1.2% to fresh 14-month lows while emerging sovereign debt narrowed 1 basis point to trade 356 bps over US Treasuries.

"We are seeing investors take profits wherever they have profit to take and that's impacting emerging markets. It's particularly interesting to note the price action in Asia where the worst performing currencies such as the Indonesian rupiah were among the few where (investors) still had high exposure," said Guillaume Salomon, senior fixed income strategist at Societe Generale.

Confirmation that the world's largest developing economies Brazil, Russia, India and China (BRICS) would consider raising their holdings of euro-denominated bonds with their massive did little to soothe market fears.

"Yes, the BRIC news could potentially be positive but the market is getting tired of comments that are not being followed through. Financial markets want to see something concrete actually being done," added Salomon.

Russian rates

Emerging European markets, where investors were more lightly positioned, held up better, with the Thomson Reuters regional index firming 0.2%.

Russian shares were up nearly 1% while Hungarian and Polish stocks rose over 1% to lift off recent 26-month lows.

Romanian shares snapped a four-day losing streak to rise 1.4%.

Emerging European currencies fared less well, with the forint slipping about 1% to new one-year lows .

Budapest appears set on introducing a plan to enable families to repay foreign currency loans at a big discount to market levels, despite outrage from neighbouring Austria, home to some of the region's top lenders.

The cost of insuring Hungarian sovereign debt against default inched 5 bps to hit a new two-and-a-half-year high.

"The outstanding amount of foreign currency loans is close to €20bn. Let's imagine that everyone manages to borrow in forints to refinance. Apart from the immediate hit on the banking system (25% discount on the exchange rate), the ultimate provider of the initial loan (ie banks in Western Europe) need to be repaid.

"This means that Hungarian banks would need to buy quite a lot of euro/forint... For the time being, we think that the HUF could stay under pressure," BNP Paribas said in a note.

Five-year credit default swaps for Poland, which also has significant levels of foreign currency household debt, climbed to fresh 29-month peaks while the zloty weakened 0.4% to the euro, slightly off Tuesday's over two-year lows.

Meanwhile, Russia surprised investors by narrowing the spread between lending and deposit interest rates, a move that some said could herald a widening of the ruble's floating band.

The ruble tested an eight-month low to the dollar.