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Distressed markets are hurting most from rich-world bank turmoil

Tan KW
Publish date: Thu, 23 Mar 2023, 08:18 AM
Tan KW
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LONDON: Bond markets in some of the world’s most vulnerable economies are flashing default warnings as turmoil in the United States and European banking systems makes it even tougher for fragile emerging nations to borrow and repay debt.

Countries that have been tottering on the brink of default have shouldered the brunt of a sell-off in emerging markets this month, sending yields toward unprecedented levels.

The fallout from a series of banking failures in the United States forced a rescue of Swiss lender Credit Suisse Group AG in Europe and sent investors fleeing from the riskiest assets worldwide.

From Pakistan to Bolivia, investors are now expressing growing doubts about the ability of distressed economies to repay their foreign-currency debts.

Adding to the uncertainty is the Federal Reserve’s policy meeting soon, when US officials will decide whether to keep raising interest rates to tame inflation, or take a pause to reassess the stresses rippling across global markets.

“Risk appetite for distressed emerging-market credit has collapsed as the market looks at these guys as the weakest links and highly susceptible to a sudden stop,” said Gordon Bowers, a London-based analyst at Columbia Threadneedle Investments.

“The fear is that tighter global financial conditions could reflexively push distressed credit to the breaking point as a disorderly foreign-currency depreciation makes servicing debts unbearable, cascading into a wave of defaults.”

The risk premium on Tunisia’s bonds over Treasuries widened by about 1,690 basis points since end-February to a record of 3,930 on Monday.

The cost to insure the debt against default has surged the most globally this month to an all-time high of 2,436 basis points, as mob violence led to concern that an urgent International Monetary Fund (IMF) bailout could be delayed.

The spread on North African neighbour Egypt’s dollar bonds jumped back above 1,000 basis points this month, after falling below that key threshold for debt to be considered “distressed” in October, when it clinched its own IMF deal.

Its credit-default swaps are approaching all-time highs reached in July as bond investors lose confidence.

Bolivia’s bonds too joined the distressed club this month, with the spread reaching a record of 1,274 basis points on Monday.

Fitch Ratings lowered its assessment of the South American nation deeper into junk while S&P Global Rating signaled it could be downgraded as its foreign-currency reserves evaporate.

The bonds sank to record lows Monday as the nation was due a US$22.5mil coupon payment.

In Asia, Pakistan’s bonds have been among the biggest losers in emerging markets this month as a deepening political crisis looked set to exacerbate delays in fixing urgent fiscal and economic woes.

 - Bloomberg

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