Emerging Markets
The flight of capital out of emerging market economies this week showed how countries with substantial reliance on foreign borrowings are being hit this week just as we think the financial crisis in the developed markets have been rescued.
Lenders to these economies (banks, hedge funds, mutual funds) who are now deleveraging is causing the currencies to collapse and pushing up the cost of borrowing for their respective governments bonds as seen by the widening of sovereign credit spreads.
Iceland, Hungary and Ukraine, all of which are in discussions with the International Monetary Fund on a bailout. South Korea won has fallen 29% in the last three months, and shares have fallen more than 20% this week as wholesale funds that are being withdrawn by international markets.
Argentina's credit spreads (1 yr) has risen from 3000bp end of last week to 4600bp on Thursday as the government moved in to nationalise pension funds.
4600 bps means that it costs $4.6m to protect $10m worth of bonds. To put it into perspective, just prior to Brazil defaulting on their bonds in 2001, their Credit Default Spreads also jumped to 4500 bps.
Pound falls to lowest since 1971
The flight of capital out of emerging market economies this week showed how countries with substantial reliance on foreign borrowings are being hit this week just as we think the financial crisis in the developed markets have been rescued.
Lenders to these economies (banks, hedge funds, mutual funds) who are now deleveraging is causing the currencies to collapse and pushing up the cost of borrowing for their respective governments bonds as seen by the widening of sovereign credit spreads.
Iceland, Hungary and Ukraine, all of which are in discussions with the International Monetary Fund on a bailout. South Korea won has fallen 29% in the last three months, and shares have fallen more than 20% this week as wholesale funds that are being withdrawn by international markets.
Argentina's credit spreads (1 yr) has risen from 3000bp end of last week to 4600bp on Thursday as the government moved in to nationalise pension funds.
4600 bps means that it costs $4.6m to protect $10m worth of bonds. To put it into perspective, just prior to Brazil defaulting on their bonds in 2001, their Credit Default Spreads also jumped to 4500 bps.
Pound falls to lowest since 1971
In the UK, the aggregate of corporate, personal and public sector debt - is equivalent to three times the its GDP. With financial services shrinking and the global economy slowing down, onone knows when the debts can be paid down , hence its hardly surprising that the market is driving down the pound.
With a sharp rise in public sector borrowing expected from bailing out the banking sector, a structural trade deficit with huge reliance on financial flows, and falling tax revenues from a slowing economy, the government is insisting on pursuing a Keynesian approach to ramp up government spending so as to avoid a economic downturn, but this is huge gamble that this recession will not last more than 2 years or else it may soon find itself impossible to climb out that huge hole it has dug itself into.
Eric Tan, Madrid.
Eric Tan, Madrid.
No comments:
Post a Comment