Emerging markets end mixed; spreads tighten; Ecuador at default levels; Venezuela bonds show gains

By Aaron Hochman-Zimmerman

New York, Nov. 14 - Emerging markets managed a few bright spots to end a volatile week on Friday.

Spreads tightened, even in light of the threat of default from Ecuador.

Despite the one day of tightening, emerging market bond funds ended their 14th consecutive week of outflows to the tune of $13.3 billion, according to EPFR Global.

The funds continue to hemorrhage as the "commodities export story unravels and those with shaky public finances scramble to plug growing gaps," EPFR said in a news release.

The major markets also provided more heartburn as equities in the United States lost hold of a midday rally and volatility spiked at the end of the session to end higher by 6.48 at 66.31, according to the VIX index. The index is a common measure of market volatility.

Also, emerging markets indices were affected by the steep drop in Ecuador. Despite the credit trading at default levels, the emerging market spread managed to tighten, but by only 9 basis points to a spread of 661 bps, according to JPMorgan's EMBI+ index. The EMBI+ estimates the amount of extra yield investors will demand to hold assets in emerging market debt.

Ecuador 'down the tube'

Ecuador hamstrung any significant tightening of the emerging market indices and is "down the tube," said Enrique Alvarez, a Latin America debt strategist at think tank IDEAglobal.

If a level of 20 bid is a typical recovery value, the 12% bonds due 2012 were spotted at 14 bid, 16 offered. The price represents a drop of between 16.5 and 17 points, "that's just huge," he said.

Investors dropped Ecuador like a hot rock after it opened a commission to review whether or not to make payment on its 12% bond.

"It could fall to a dime if that's the recovery value people see it at," Alvarez said.

There are still two D-Days between now and actual default, he said.

The first is a 30-day grace period for payment and the second is a committee report on the payment due Nov. 20.

"Why would they pull something like this?" Alvarez asked, "They're testing the waters," he said.

Ecuador's government could announce a default immediately, but they will check the world's reaction first to see if they can get away with this, he said.

There is also the question of how much a missed payment on the bonds due 2012 will tarnish the reputation of Ecuador's other credit. Standard & Poor's already cut the credit rating to CCC- from B-.

"They may not pay," Alvarez said about payments due on other issues.

The problems all root from an over-reliance on oil, he said.

"They put together a 2009 budget with an $85-per-barrel price tag on oil," he said and the oil Ecuador produces "trades at a discount to WTI (West Texas Intermediate)."

"They're getting $40 to $42 per barrel," he said.

The 8% Ecuadorian bonds due 2030 were trading at 22 bid.

LatAm 'pretty mixed'

Elsewhere around Latin America, issues were overall flat.

Ecuador's collapse may have a mild drain on Argentina, Alvarez said, but "beyond that it's pretty mixed."

The 8.28% Argentine discount bonds were seen at 24 bid, 25 offered.

"Venezuela is up, which is interesting," he said.

It's a place where you may "rotate some of your positions if you were into Ecuador," he said.

The 9¼% Venezuelan bonds due 2027 jumped by 5.5 points to 64.75 bid.

Also in Latin America, Brazil's 7 1/8% government bonds due 2037 added 0.5 point to 92.5 bid, 94 offered.

Emerging Europe tighter

Elsewhere, flows continued to increase from the drought that began the week, and issues crept "a little bit tighter" in emerging Europe on Friday, a trader said, even as the eurozone made its recession official.

The 0.2% economic contraction in the third quarter made the second consecutive period of negative growth.

Still, the market tone was encouraged by equities in Europe and Asia, which "did fairly well last night," the trader said during London's Friday afternoon.

"People are excited about this G-20 thing," he added about the widely attended international economic forum.

Meanwhile, prospective E.U. member Serbia was awarded a $520 million 15-month standby loan by the International Monetary Fund.

The funds "will give us the possibility to withdraw funds only if we need them, but we will do our best not to use them," said Serbian finance minister Diana Dragutinovic.

Emerging European nations have relied heavily on the IMF with loans already granted to Belarus, Hungary and Ukraine.

Meanwhile in emerging Europe, Russia's parliament is working on a bill that may allow prime minister Vladimir Putin to return to the presidency for 12 years after president Dmitry Medvedev's first term expires.

Putin was compelled by the Russian constitution to leave the presidency after two terms, but the new law would extend each term to six years from four years and may even allow Putin to serve another two terms.

The Russian government bonds due 2030 were quoted at 83 bid, 84.75 offered.

In Turkey, after S&P lowered the country's credit outlook to negative from stable the credit continued to suffer.

Also, the number of Turkish workers seeking unemployment benefits grew by 49% in October.

The jump in claims worried economists who expect second-half unemployment to grow from the 9% rate calculated from May to July, the Hurriyet Daily News reported.

The Turkish sovereign bonds due 2030 were spotted at 124 bid, 127 offered.

Investors also showed strong interest in Romania's bonds, particularly the issues due 2010 and 2012, the trader said.

The Romanian five-year CDS was seen at 560 bps bid, 620 bps offered.

Asia spreads narrow

Asia posted a stronger day to end the week as overnight equities were able to provide some leadership.

In the Philippines, the IMF cut the country's GDP growth projection to 3.5% from 3.8% in 2009, according to the Manila Times.

The Philippine government anticipates 3.7% to 4.7% growth.

The IMF also projected the 2009 budget deficit at PHP 140 billion, or 1.7% of GDP, while the government projects only a PHP 102 billion deficit.

The peso was seen trading at 49.37 to the dollar.

In Indonesia, the rupiah struggled as well.

The rupiah was seen trading at 11,530.50 to the dollar.

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