Change font size:   

 
Bank deleveraging has barely started

Bank deleveraging has barely started

Banks lending money to governments to help fund bank bailouts looks horribly circular

Abigail Hofman:

Abigail Hofman:

I wonder if ______ is an extremely optimistic person or in a cocoon of senior management denial

weeklyFiXLiquid real estate
Skip Navigation LinksHome :: Back Issues :: The two sides of emerging markets

September 2000

The two sides of emerging markets


Some emerging markets have found the route to salvation, others are a whisker from damnation. By Michael Peterson




Investors who owned single-B Ecuador bonds and double-B Mexico debt at the beginning of 1999 might have been forgiven for thinking that their holdings were in the same asset class. But these two Latin American countries have taken very different paths since then. While Ecuador left investors shell-shocked by becoming the First country in 50 years to default on its international bond obligations, Mexico has become one of the stars of the emerging markets.
       

Even before Moody's upgraded Mexico to investment grade in March this year, the country was borrowing like a member of the world's developed elite. Earlier that month the country issued a e1 billion 10-year bond priced at 210 basis points over German government bonds. Not a bad spread for a country that suffered a devastating currency and banking crisis only six years ago.
In some ways, Poland's transformation has been even more dramatic. Just one week after Mexico's euro issue, the central European sovereign brought its debut offering in the single currency. It paid less than 1% over 10-year Bunds for the e600 million deal. That's a respectable borrowing cost for a country that began the 1990s locked in talks with the Paris Club.
What both Mexico and Poland have in common is that they are seen as convergence plays. Mexico's membership of Nafta has brought the country under the spell of the US economic miracle, while Poland is seen as a sure bet for entry into the European Union and the eurozone within the next few years.
In little more than 18 months, investors have switched from wondering which country will be the next to devalue its currency to hunting for the next convergence candidate. "It's not long since Russia restructured its internal debt," points out Charlie Berman head of European debt capital markets at Schroder Salomon Smith Barney. "People were asking whether any Russian entity would be able to issue international bonds again. Now only two years later Russia's bonds have recovered. It just shows how strong the underlying Financial system is and how it can cope with shocks."
Although the general pattern of recent months has been a gradual improvement in sentiment, emerging market spreads remain highly vulnerable to the slightest falter in investor confidence. "It hasn't been a stellar year for emerging-market borrowers," says Simon Meadows, head of international debt capital markets at Credit Suisse First Boston in London. "But spreads performed well until April when equity market volatility and elections in Mexico introduced some instability which made access difficult. Subsequent to the Mexican election result, the emerging market asset class has performed well and most big emerging markets sovereigns are either ahead of target or have completed their budget for the year."
End of the taboo
Of course, emerging markets have always been a volatile asset class. But in the past 12 months investors have become all too aware that they are getting paid for taking credit risk, not just for being prepared to accept wild swings in prices.
Ecuador's failure to make a late coupon payment in October shattered any lingering belief that sovereign international bonds were immune from default. Since then, Pakistan and Ukraine have carried out forced restructurings of their Eurobonds and Côte d'Ivoire has missed coupon payments on its Brady Bonds.
What is surprising is how quickly default has become accepted as a normal part of the market. A recent Moody's report predicts that vulture funds will soon resort to the courts as a "quick Fix" for recovering some money on bonds they bought at a discount. But to date, no bond investor has Filed a suit against a defaulting sovereign.
Rather, bondholders have accepted every restructuring package they have been offered. This year three sovereigns, Pakistan, Ukraine and last month Ecuador, have won acceptance from bondholders for exchange oVers which give them much easier terms than their old obligations.
Does this leave the emerging markets polarized between the convergence plays at one extreme and the basket cases at the other? Richard Luddington, head of capital markets for central Europe, the Middle East and Africa at JP Morgan, thinks this depiction is a little extreme.
He prefers to talk of a number of countries as marginal investment opportunities. "Russia is now coming aggressively out of that phase," he says. "Others, such as Romania, have not joined the marginal club despite fears late last year that they might."
Russia has demonstrated how quickly it is possible to bounce back from disgrace. In the past 12 months Russian Prins, one of the bonds on which the country defaulted in 1998, have risen from single-digits to over 30 cents in the dollar. Some of the country's shorter dated Eurobonds are now trading at close to par.
While Russia has successfully put its domestic restructuring behind it, other sovereign borrowers are only now throwing off the last vestiges of a much earlier debt crisis. "The big theme in terms of proactive liability management continues to be the eradication of Bradys," says Luddington, at JP Morgan. "Countries want to eliminate this stigmatized debt, and they have tempted investors to swap it for large, liquid, long-dated securities."
The biggest of these deals came in August when Brazil swapped most of its remaining Brady debt for $5.2 billion-worth of 40-year bonds, saving itself $145 million in net present value terms. A number of other large Brady debtors, including the Philippines and Mexico, have also retired much of their Brady debt in the past year.
Growing competition
The general recovery in appetite for emerging market debt is proving irresistible to some investment banks. But there is no sign yet of the gold-rush mentality which characterized the late 1990s emerging market boom.
       

Luddington at JP Morgan notes that there have been some sovereign mandates recently won on very tight fees, but doesn't think fee-slashing is yet a big problem. "Issuers want to know that the bank leading their deal will provide liquidity throughout the life of the bond," he notes. "They know which Firms are likely to stay around. The league tables now are not a lot different from Five years ago."
  Page 1 of 2  Next | Single Page






They’re like the Borg, once you get absorbed in them... that’s it. You have hexagons in the blood for life

A DCM banker in Hong Kong assesses the corporate culture at HSBC

  1. US treasury market reaches breaking point

  2. Top 10 financial definitions that are funnier since the credit crunch

  3. Top 10 reasons to tell your boss you deserve a bonus this year

  4. Eksportfinans turns to government for funding

  5. Nomura’s great leap forward: Will Lehman takeover help fulfil its global ambitions?

Latest Issue

December 2008
Ruromoney Jobs Post a job

Home | Mobile site | Contact Us | Debt markets | Equities | Foreign exchange | Banking | Alternative Investments | Regions and Emerging markets | Polls & Awards | Structured credit | Back issues | Euromoney store | Useful links and Related events | Site Map

The material on this site is for financial institutions, professional investors and their professional advisers. It is for information only. Please read our Terms and Conditions, Privacy Policy before using the site.

All material subject to strictly enforced copyright laws. © 2008 Euromoney Institutional Investor PLC.