Emerging markets lashed; Ecuador bonds up on auditor report; Hungary, Turkey line up IMF loans

By Aaron Hochman-Zimmerman

New York, Nov. 20 - Emerging markets were pounded again as equities continued to shake the foundation of the world's credit markets.

"I'm not seeing a great deal of flow," a trader said.

"I put the pressure on equities, really," he said, blaming equity influence for leading bonds lower.

Interest and cash continues to be drawn from the market, he said.

"I think there is more focus on the Christmas parties now," he said, "if there will be any."

In trading, Ecuador added 1 point to the issues on its curve even as the likelihood of default became more of a reality with the release of a government audit, which labeled much of the country's debt illegitimate.

More certainty about its future made investors more comfortable with adding the risk of the severely discounted credits.

From the major markets, stocks improved and volatility dipped in the early afternoon, but a late-day sell-off for U.S. equities launched volatility up by 6.60 to 80.86, according to the VIX index. The index is a common measure of market volatility.

A flight to Treasuries pushed emerging market spreads closer to their all-time wides at 827 basis points. The EMBI+ was wider by 54 bps to a spread of 779 bps, according to JPMorgan. The EMBI+ determines the amount of extra yield investors are willing to accept in order to hold assets in emerging market debt.

Emerging Europe testing wides

Emerging Europe has "certainly widened a lot in the last couple of days," a trader said, with "a fairly large amount of apathy among clients."

"It's very, very quiet," he said. "We're not seeing a great deal of flow."

In Russia, prime minister Vladimir Putin promised to do "everything" it takes to defend the country from "the collapses of past," which "will not be repeated," he said at a press conference.

A devaluation of the ruble eventually led to a foreign debt default in 1998.

On Wednesday, finance minister Alexei Kudrin was compelled to reassure lawmakers that the central bank has enough currency and precious metal reserves to support the ruble for the long term.

The ruble was seen trading at 27.609 to the dollar.

The Russian government bonds due 2030 dropped 1.75 points to 78.25 bid, 79.25 offered.

"The one that's really gone bad in the last couple of days has been Romania," the trader said.

Five-year protection has eased off of a recent high print at 750 bps bid, but now trades closer to 725 bps bid, he said.

"Poland is pretty close" to its high of 310 bps bid, he added.

The Polish five-year CDS was seen trading at 260 bps bid, 280 bps offered.

Loan department

While the International Monetary Fund approved a $2.1 billion loan for Iceland, the European Union offered up a €6.5 billion portion of the €20 billion credit facility Hungary is expecting from the IMF.

"Hungary hasn't really moved" and "is not doing that well," a trader said.

Hungary's five-year CDS is tighter of recent wides at near 650 bps bid, the trader said.

Also in Turkey, prime minister Recep Tayyip Erdogan continued to strike a different note concerning a possible IMF loan.

After opposing the idea of any assistance, reports said Turkey is in negotiations to receive between $20 billion and $40 billion in loans.

IMF director Dominique Strauss-Kahn announced that no specific amount is slated for Turkey but that negotiations are coming to a conclusion, reports said.

The Turkish sovereign bonds due 2030 fell 1.5 points to 121.5 bid, 124.5 offered.

LatAm sinks, Ecuador floats

Latin America was a "mixed bag" on Thursday, said Enrique Alvarez, a Latin America debt strategist at think tank IDEAglobal.

"Spreads are obviously wider because you had a sharp drop in U.S. Treasury yields," he said, but "prices are on the downside" as well.

Ecuador has represented most of the category's upside as default seemed more and more likely on the day that the country's auditors deemed the country's foreign debt illegitimate.

Still, bonds were up as the default scenario has been discounted and "people are covering a little now that we know the cat's out of the bag," Alvarez said.

President Rafael Correa has been asking debtholders to renegotiate terms, Alvarez said.

Correa is offering investors to "take a 60% haircut or you get nothing," Alvarez said.

The 8% Ecuadorian bonds due 2030 and the 12% bonds due 2012 were each better by 1 point at 23 bid, 25 offered and 26 bid, 28 offered, respectively.

The turmoil in Ecuador directed investors' attention to its political ally, Venezuela, which is one of Ecuador's major debtholders.

Various numbers have been floated by the market, but it is believed that Caracas will owe $382 million in the case of an Ecuador default.

In terms of the Venezuelan budget "it's not that big of a deal," Alvarez said.

However, oil prices continued to drop on Thursday and traded as low as $48.50 per barrel.

The 9¼% Venezuelan bonds due 2027 sank 2.5 points to 65.35 bid, 66 offered.

In Argentina, the Senate is expected to pass the government's pension fund nationalization program by a margin of at least 42 votes to 30 votes, the Buenos Aires Herald reported.

The 8.28% Argentine discount bonds due 2033 gave up 1.5 points to 22 bid, 27 offered.

Elsewhere, Brazil's 7 1/8% bonds due 2037 were lower by 2 points to 88 bid, 90.5 offered.

Also in Latin America, Peru established a free trade agreement with China during a visit by Chinese president Hu Jintao.

"The doors of Peru are open to mining, port and infrastructure companies," said Peruvian president Alan Garcia, according to the BBC.

Critics of the deal are worried that an inflow of cheap Chinese manufactured goods will undercut Peruvian products and cost local industry.

Asia ripped wider

Asian spreads were pulled wider during another illiquid session by soaring Treasuries.

In the Philippines, finance secretary Margarito Teves lobbied Asean (Association of Southeast Asian Nations) for action to combat the effects of the global slowdown at a meeting of regional financial leaders in Manila.

"I am confident that if we dare together as one region, we can collectively hurdle the current challenges," Teves said, according to the Manila Times.

During the meeting Teves proposed a broadening of the Chiang Mai Initiative, which allows Asean members to lend money to each other at discounted rates in order to support local currencies.

The peso was seen trading at 49.9 to the dollar.

In Indonesia, the energy regulator BPMigas will begin to require oil and gas firms to exclusively use local banks to finance their operations, the Jakarta Post reported.

"This policy aims to increase our banks' liquidity," said R. Priyono, BPMigas chairman.

"As the oil and gas sectors use many dollars, it will also boost dollar liquidity in our domestic banks. It will have positive effects on our banks' balance of payments," Priyono said.

In 2009, up to $11.8 billion of volume is expected to flow through the Indonesian energy trade.

Meanwhile in China, as the financial crisis filters down to the retail economy, unemployment is expected to rise above the current target of 4.5%.

Some officials are expecting greater incidences of social unrest as Chinese prosperity fades, the BBC reported.

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