Emerging markets stumble; Argentina smashed on pension fund nationalization talk; spreads widen

By Aaron Hochman-Zimmerman

New York, Oct. 21 - Emerging markets were limping after another difficult and illiquid session on Tuesday.

Bond issues, particularly from the high-beta corners of Latin America, were pushed closer to the dangerous levels as liquidity was simply unavailable.

Emerging Europe was able to end with a small number of bright spots as the major market perspective continued to feel slightly more comfortable with the credit market.

Rather than an outright return of optimism, the market could afford to be less pessimistic as "Libor and all of the big picture is getting better," a trader said.

Argentina was not interested in nuanced optimism as a plan to nationalize pension funds compounded other problems. The benchmark discount bonds due 2033 fell to 30.25 bid.

Meanwhile, equities also fell as volatility inched higher on Tuesday. The VIX index added 0.14 to close at 53.11. The index is a common measure of market volatility.

Treasuries were advancing as the situation seemed to grow even more desperate for emerging markets, especially for Latin America. Spreads were thrown out by 37 basis points to a spread of 683, according to JPMorgan's EMBI+ index. The EMBI+ estimates the amount of extra yield investors will demand to hold assets in emerging market debt.

Argentina, LatAm burning

Argentina "is on fire," said Enrique Alvarez, a Latin America debt strategist at think tank IDEAglobal, and not in the good way.

"And so is the rest of the category," he said.

Wide bid-offer spreads, the low settlement of Lehman Brothers CDS contracts, and low liquidation due to losses in other categories have left the sector in shambles and "divorced from the leadership of U.S. equities," he said.

Leading the way down was Argentina, which, in order to save its own pensioners, took over the country's pension funds, Alvarez said.

The nationalization may be a bad sign for the economy, but it may stave off default at least through 2010, he said.

The government is now in control of the pension funds' assets, although they also assume the pension funds' debts. Many of the debts are to the government itself.

Investors were not enthused by the takeover as the 8.28% Argentine discount bonds due 2033 plummeted 7.5 points to 30.25 bid, 31.5 offered.

Elsewhere, crude prices continue to be too low to support the ambitions of Venezuela.

"Oil is not doing well," Alvarez said, as light sweet crude traded below $71 per barrel on Tuesday.

"The outlook for financing is quite bleak," he said. "Add the political factors and the equation you come up with is pretty terrible," he said.

Investors in high-beta paper are "running for the hills," he said, as the prospect of issuing new debt would require paying up to 25% yields in some cases, and "that can't happen."

The 9¼% Venezuelan sovereigns due 2027 fell by 1.25 points to 53.75 bid, 54.5 offered.

Even for the investment-grade issuers, the primary remains firmly closed.

Brazil "is not really at 25% yields, but it's coming rapidly above 9% to 10%," he said, "which is still pretty expensive."

The 7 1/8% Brazilian bonds due 2037 were spotted at 82 bid, 84.75 offered.

"Everyone is on the same wavelength," he added.

Mexico would also likely require a 9% to 10% yield for any new debt, he said.

The 5 5/8% Mexican sovereign bonds due 2017 were lower by 1.25 points to 83.45 bid, 83.75 offered.

Emerging Europe rally builds

Emerging Europe began the day at a tempered and modest pace but "then things seemed to rally, mainly on CDS," a trader said.

The frenzy of buying and selling carried investors through bouts of damnation and salvation, but in the end the market tightened, he said.

The brighter tone surrounding the credit market has left equities in a better position, he said.

"The stock market has seemed to have some of the heat taken off," he said.

Still, "it feels schizophrenic," the trader said. "It's still pretty bad out there, isn't it?"

In Russia, president Dmitry Medvedev has been able to honor his agreements regarding Georgia, according to French and E.U. president Nicolas Sarkozy.

Sarkozy encouraged his colleagues in the European parliament to work with Russia.

"Europe should be just and should overstep without hesitations, if need be, the boundaries of ideology to restore peace," he said, according to the Itar-Tass News Agency.

Still, "Russia's response to the Georgian conflict was quite disproportionate," Sarkozy said, but added that his use of the word "response" was not by chance.

"It was preceded by utterly inadmissible actions," he said about Georgian intrigue in South Ossetia and Abkhazia.

Also in Russia, finance minister Alexei Kudrin announced that the government agreed to offer a $2 billion loan to stabilize the economy of Belarus.

The first $1 billion tranche of the loan will come before the end of the year; the second tranche will be offered in 2009.

The Russian government bonds due 2030 were seen at 86 bid, 86.5 offered.

Elsewhere in emerging Europe, Turkey's bonds due 2030 were spotted at 121 bid, 122 offered.

Ukraine wider as parliament returns

Meanwhile in Ukraine, the parliament returned to work after being "reanimated" by president Viktor Yushchenko.

In addition to reinstating parliament on a temporary basis to develop an economic crisis plan, Yushchenko agreed with prime minister Yulia Timoshenko to push elections back one week to Dec. 14.

Timoshenko pushed to hold off the elections in order to establish a united voice to deal with the International Monetary Fund, which is considering a nearly $15 billion loan to Ukraine.

Yushchenko continued the country's negotiations with the IMF on Tuesday.

The Ukrainian five-year CDS widened 50 bps to 1,850 bps bid, 1,950 bps offered.

Asia pushed wider

In Asia, spreads were wider as even easing liquidity concerns made bids difficult to find.

In the Philippines, through the first nine months of 2008 the government ran a deficit of PHP 53.4 billion, or PHP 18.2 billion greater than expected, reported the Treasury Department.

The majority of the overrun can be accounted for by a PHP 14.1 billion tax collection shortfall.

Total collections hit PHP 879.9 billion by the end of September, up 8.3% from PHP 812.3 billion during the same period of 2007.

In Indonesia, the government has been working to bolster domestic industry as the global financial crisis lingers.

The Indonesian Chamber of Commerce and Industry called for increased government investment in infrastructure, especially in remote and rural areas, the Jakarta Post reported.

Chairman of the chamber of commerce M.S. Hidayat added that markets should be expanded beyond a reliance on developed economies, particularly the United States.

"Exports should also keep growing; we aim to do this by diversifying the markets," he said in the report.

Banks should also allow exports to grow, by guaranteeing credit for export business, he said.

Also in Asia, Pakistan held talks with the IMF to secure $10 billion in loans to support the economy for the next two years, reports said.

Serial financiers China and Saudi Arabia have refused help, the BBC reported.

Allies of the troubled country formed a group called the Friends of Pakistan to encourage lending institutions to offer credit or release loans already designated to Pakistan.

About $5.2 billion may be available to Pakistan, but analysts are hesitant to claim that money will save Pakistan from default.

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