Emerging markets weaken; Ecuador default official, bonds trade lower; holidays pressure volumes

By Aaron Hochman-Zimmerman

New York, Dec. 15 - Emerging markets were expectedly quiet as only Ecuador provided real action by making its default on its 12% bonds due 2012 official.

After much discussion over whether or not the government would pay, Monday was the last day the Quito government had to service a $31 million coupon payment on the 12% bonds.

Other reports indicated that president Rafael Correa may be inclined to make a scheduled payment on the bonds due 2015, but all three of the country's dollar bonds traded at default levels.

The 12% bonds lost 2 points to trade at 22 bid.

As the Christmas market holiday neared, investors anticipated continually thinning liquidity throughout the rest of the week.

"It's quiet," a syndicate official said, and "as the week goes by liquidity is just going to trickle and trickle and trickle..." he said.

Meanwhile, equities fell as the biggest names in finance showed up on the victim list of disgraced investment kingpin Barnard Madoff, even as the thought of a 50 basis point rate reduction from the Federal Reserve gathered steam.

Most economists still favored a 25 bps cut, but one-third favored the larger cut during Tuesday's meeting, the syndicate official said.

The slow retreat throughout the session lifted volatility by 2.48 to 56.76, according to the VIX index. The index is a frequently used yardstick of market volatility.

Ecuador defaults, LatAm lower

Ecuador's default dropped its bond price levels across the board, but the three dollar-bonds outstanding did not have far to fall.

President Rafael Correa had helped undercut the debt's value with repeated threats to default. The threats had become so habitual as to prevent any shock or surprise on the part of market watchers, but confusion was common.

Despite the refusal to meet its obligations, Quito had the ability to pay the $31 billion coupon payment on the 12% bonds due 2012, which began the latest round of default speculation.

"We're having a big conference call with an economist tomorrow," a syndicate official said on Monday.

"People are still trying to make heads or tails of it," he said.

The 12% Ecuadorian bonds due 2012 fell 2 points to 22 bid, 26 offered.

Meanwhile, Ecuador's ally Venezuela was likely working on its own approach to Quito's default.

For all his rants and bluster, "not even [president Hugo] Chavez, on his worst day" defaulted when his government has the ability to pay its debts, the syndicate official said.

"He's never ever shown an unwillingness to pay," he said about Chavez.

The 9¼% Venezuelan bonds due 2027 slipped 1.5 points to 54 bid, 56.5 offered.

In Argentina, president Cristina Kirchner announced a $32 billion public works program in order to help spark job growth and consumer spending.

The administration's plan intends to grow the worker pool from under 400,000 to over 700,000 over three years.

The 8.28% Argentine discount bonds due 2033 were seen unchanged at 27 bid, 28 offered.

Heavy emerging Europe slides

Emerging Europe slipped on a heavier sentiment as equities fell. Equities were lower amid breaking news of investment scandal and sluggishness to save the U.S. auto sector.

In Russia, the government will add another $5.4 billion to the real economy, said finance minister Alexei Kudrin, according to reports.

Kudrin forecast a 3% growth rate for Russia's economy in 2009 and insisted that "there is no recession in Russia yet," he said.

"Growth in tariffs will be conceivably adjusted downward, at least by 10% to 15% from the planned level," he added.

Elsewhere in Algiers, Algeria's Chakib Khelil spoke for the cartel as he announced: "We always wanted it to join OPEC," the Algerian minister of energy and mines said about Russia, according to the Itar-Tass News Agency.

Also, the Russian navy proved it was still familiar with the waters of the Caribbean as it announced scheduled port calls in Cuba from Dec. 19 to Dec. 22.

The Russian government bonds due 2030 fell 1 point to 80.75 bid, 82 offered.

In Turkey, the unemployment rate for September touched 10.3%, higher by 0.5%, the government announced on Monday, according to the Hurriyet Daily News.

Employment numbers heavily favored the countryside as urban unemployment was at 12.3% in September, compared to 7.1% in rural areas.

As the year comes to a close, the economy is likely to show less than 1% growth, after posting growth figures higher than 7% every year since 2001, the report said.

The lira was sent trading at 1.562 to the dollar.

Asia ends mixed

Asian markets were mixed as overnight equities turned in a strong performance.

Still, liquidity was thin and will continue trailing off through the New Year, a syndicate official said.

In the Philippines, domestic liquidity was cinched to a 13.1% pace in October, compared to growth of 13.5% during the same period of 2007, according to a statement from the central bank.

"The slower increase in net foreign assets pulled down the growth in domestic liquidity," the statement said.

Net foreign assets grew by 10.7% in October, compared to 11.1% in September.

Credit growth in the public sector was up by 5.3% as the national government increased its borrowing, while the growth in the private sector "remained strong" at 17%, the statement said.

Elsewhere in Indonesia, president Susilo Bambang Yudhoyono announced a cut in gas prices, according to the Jakarta Post.

"Considering inflation, we have to set the right fuel price. I have decided to cut the prices of Premium and diesel fuel," he said.

Gasoline will now cost Indonesians 5,000 rupiah per liter and diesel will cost 4,800 rupiah per liter.

"With this fuel price cut, we hope there will be a reduction in inflation by 0.3% to 0.5%, so that it should help maintain people's purchasing power," said finance minister Sri Mulyani in the report.

The rupiah was seen trading at 11,135.58 to the dollar.

Also in Asia, the lower house of Thailand's legislature chose opposition leader Abhisit Vejjajiva as the new prime minister.

The former leader Somchai Wongsawat was removed after a court order called for his removal in the wake of voter fraud.

Abhisit was born in the United Kingdom where he studied economics at Eton College and Oxford University.

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