Emerging Market Borrowing Costs Reach 4-Year High, Stocks Slump

By Denis Maternovsky and William Mauldin

Oct. 3 (Bloomberg) -- Developing nations' borrowing costs jumped to the highest in four years compared with U.S. rates while stocks headed for the worst week since 2002, as the global banking crisis drives investors from emerging markets.

Turkey's benchmark stock index tumbled 6.2 percent and Russia's Micex lost 6.1 percent, sending the MSCI Emerging Markets Index to an 8.8 percent loss this week. The extra yield investors demand on developing-nation bonds over Treasuries increased 16 basis points to 4.47 percentage points, the highest level since 2004, JPMorgan Chase & Co.'s EMBI+ Index shows.

``Markets are being driven by pre-emptive emergency measures rather than fundamentals,'' said Ralph Sueppel, chief economist at BlueCrest Capital Management Ltd. in London, which manages $2 billion in emerging-market assets. ``It's all about risk management at present and everyone's trading with a pessimistic outlook.''

Emerging-market governments are under pressure to spend reserves on supporting falling currencies and rescuing banks, at a time when reduced commodity prices and tourism are cutting revenue. The Seychelles became the first government to renege on debt obligations in two years after saying it will miss interest payments due today on $230 million of bonds as its currency reserves head toward ``near-exhaustion.''

Ukraine's central bank is supporting the hryvnia after it dropped as much as 2.5 percent against the dollar this week, Martin Blum, head of emerging-markets economic and currency strategy at UniCredit SpA in Vienna, said today, citing the Milan-based bank's foreign-exchange traders.

Default Swaps

The cost of protecting against a default by Ukraine is higher than for any of the 14 European developing nations with credit-default swaps tracked by Bloomberg, after doubling since August to a record 810 basis points today, according to CMA Datavision in London.

Ukraine is becoming the ``whipping boy'' for investors betting on declines in Europe's emerging markets as its government teeters toward collapse, Ian McCall, a director of London-based hedge fund Argo Capital Management, said this week. The ruling coalition led by Prime Minister Yulia Timoshenko and President Viktor Yushchenko formally fell apart Sept. 16 after disagreement on its response to Europe's highest inflation and Russia's five-day war with neighboring Georgia.

Russia credit-default swaps rose 10 basis points to 270 today, after soaring 123 basis points in September, the biggest monthly increase in at least four years.

Credit-default swaps, contracts conceived to protect bondholders against default, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements. An increase indicates a deterioration in credit quality. A basis point is 0.01 percentage point.

Job Losses

The yield on the Russian government's 30-year dollar bonds increased 3 basis points to 7.2 percent, the highest level since September 2004, Bloomberg prices show.

Investors are seeking only the safest assets on concern the U.S. is heading toward a recession, triggered by the worst financial meltdown since the Great Depression. The world's largest economy probably lost 105,000 jobs last month, the biggest decline for payrolls in five years, according to the median estimate of economists surveyed by Bloomberg News before the Labor Department report due today.

Interest rates on three-month dollar loans increased to the highest since January as financial institutions hoard cash to meet future funding needs. Crude oil is poised for its biggest weekly drop in New York trading since 2004 while commodities fell the most since at least 1956, according to the Reuters/Jefferies CRB Index of 19 raw materials.

Turkey to India

The MSCI Emerging Markets Index of shares dropped 1.7 percent to 746.52, the lowest level since July 2006, as of 12:03 p.m. in London trading, after a 3.4 percent decline yesterday.

``Temporarily, investors seem to have forgotten fundamentals,'' said Jonathan Garner, chief emerging-markets strategist at Morgan Stanley in London. ``Even though emerging markets growth is going to slow next year, it's going to be far away from a recession.''

Turkey's benchmark index headed for its biggest decline since March as it reopened for the first time since Sept. 29. Russia's Micex Index extended its loss this year to 52 percent. India's Sensex index slid 4.1 percent and the Philippine Stock Exchange Index fell 2 percent.

Nickel, Potash

OAO GMK Norilsk Nickel, Russia's biggest mining company, dropped 14 percent to 2,882, its biggest decline since listing. Norilsk's first-half profit fell to $2.7 billion from $4 billion a year earlier on lower nickel prices and higher costs.

VTB Group, Russia's second-biggest lender, fell 6.2 percent on the Micex Stock Exchange after the bank said it biggest unit lost 9.31 billion rubles ($360 million) in September.

Russia suspended trading for two days and pledged more than $100 billion in emergency funding last month as the seizure in capital markets, falling oil and the war in Georgia triggered at least $58.9 billion in investor withdrawals from Russia since Aug. 8, according to BNP Paribas SA.

OAO Uralkali, Russia's second-biggest potash producer, tumbled 12 percent to 113 rubles after sinking 14 percent yesterday. OAO Gazprom, the stock with the biggest weighting in the emerging-markets benchmark, fell 5.6 percent and OAO Lukoil, Russia's second-biggest oil producer, dropped 6 percent.

-- With reporting by Emma O'Brien in Moscow. Editors: Gavin Serkin, Daniel Hauck

To contact the reporter on this story: Denis Maternovsky in Moscow at dmaternovsky@bloomberg.net