Collapsing "Emerging" Markets

Russia, Indonesia, Ukraine and Romania shut their stock exchanges after shares plummeted in the worst week for emerging-markets in at least two decades.

Russia's Micex Index dropped 14 percent, having already slumped 20 percent this week, before trading stopped at 11:05 a.m. in Moscow. The exchange won't reopen until Oct. 10 unless the Federal Financial Markets Service says otherwise, Micex spokesman Alexei Gerasyuk said by phone. The Jakarta Composite index fell 21 percent in its biggest weekly slump in at least 25 years, according to data compiled by Bloomberg.

Investors are fleeing on concern the worsening global credit crisis will cause more banks to collapse and push the global economy into recession, lowering the price of the commodities that drive developing nation economies. The benchmark MSCI Emerging Markets index is headed for its worst weekly decline since it was established in 1987 after falling 21 percent.

"The market is in survival mode,'' said Ralph Sueppel, chief economist at BlueCrest Capital Management Ltd. in London, which manages $2 billion in emerging-market assets. "Concerns over liquidity, counterparty risk, and mark-to-market risk limits prevent institutional investors from doing what they are supposed to do: correcting misaligned asset prices by seeking a profit.''

Ukraine's exchange was closed for the day before trading began, and Romania suspended its main bourse after a 9.5 percent slide. Egypt's benchmark CASE 30 Index plunged 14 percent at 11:56 a.m. in Cairo, according to the bourse's Web site, after losing the same amount yesterday.

Medvedev Plan

Russia's Micex Index has lost 66 percent of its value this year, compared with a 62 percent drop for China's CSI 300 Index and a 44 percent decline on India's Sensex.

Russia's dollar-denominated RTS bourse will stay shut "indefinitely,'' RTS spokeswoman Varvara Inozemtseva said by phone. Regulators have halted stock trading 10 times since Sept. 16 as President Dmitry Medvedev's package of $186 billion in support for banks and companies fails to instill investor confidence that the government can arrest its worst financial crisis since its 1998 default and ruble devaluation.

Indonesia's suspension, the first in eight years, followed a 10 percent slide in the Jakarta Composite Index, the biggest decline since the 1998 Asian financial crisis.

"Rising credit risk has escalated the pressure for investors to cash in and cut their assets in the high-risk emerging markets of Asia,'' said Renault Kam, a senior portfolio manager at Atlantis Investment Management in Hong Kong, which oversees $5 billion.

Default Swaps

The cost of protecting Russian and Indonesian government debt against default jumped to the highest in at least four years. Russia credit-default swaps rose 52 basis points to 352, up from as little as 36 basis points in May 2007, and contracts on Ukraine climbed 42 at 953. Contracts on Indonesia increased 64 basis points 579, and South Korean credit-default swaps advanced 45 to 312, according to CMA prices.

The extra yield investors demand to own developing nations' bonds instead of U.S. Treasuries has doubled since June and rose 14 basis points to 5.11 percentage points today, according to JPMorgan Chase & Co.'s EMBI+ index. That's the highest spread since June 2004.

Credit-default swaps are financial instruments based on bonds and loans that are used to speculate on a company's or a country's ability to repay debt. They pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements. An increase indicates a deterioration in the perception of credit quality.

A basis point on a credit-default swap contract protecting $10 million of debt from default for five years is equivalent to $1,000 a year.

Beijing to Budapest

The MSCI Emerging Markets Index fell for a sixth day, dropping 7.1 percent to 612.24, the lowest level since October 2005. The index slid 18 percent in September, its worst month since August 1998.

Hungary headed for its worst daily decline since 1999 as the Budapest Stock Exchange fell 6.3 percent. Latvia's OMX Riga Index lost 6.5 percent to its lowest level since January 2004.

India's Sensex index slid 5.0 percent and China's CSI 300 Index fell 3.8 percent, its third day of declines. South Korea's Kospi Index lost 5.8 percent.

Source - Bloomberg