Maravi

(GUARDIAN UK) Boom nations to catch cold as west's financial disease strides the globe

Boom nations to catch cold as west's financial disease strides the globe
Simon Bowers The Guardian, Friday October 17 2008

The western financial crisis is turning global as capital-flows throughout the developing world have been transformed by the credit crunch into destructive riptides for scores of economies.

Many boom nations of eastern Europe, Asia and Latin America are among those abruptly stalling, leaving governments wrongfooted by an investment exodus. Economists have been drawing up a critical list of vulnerable countries - identifying those struggling with giant current account deficits, undercapitalised banks, overheated stockmarkets and exposures to short-term overseas borrowing.

"The three Baltic states along with Ukraine, Kazakhstan, Bulgaria and Romania - and of course Iceland - are at the top of the list," said Nick Chamie, of RBC Capital Markets. He singled out Hungary, Romania, Latvia, Lithuania and Estonia as least able to mimic the recent western bank bail-outs that have helped more mature economies reduce some of the most damaging effects of the crunch.

Officials from the International Monetary Fund rushed to Kiev earlier this week. A succession of Ukrainian governments have failed to tame a foreign credit-fueled consumer boom and soaring inflation. An emergency IMF loan of up to $14bn (£8.1bn) is being lined up as the local currency, the hryvnia, plummets.

The move follows Iceland's crisis talks with both the IMF and Russian officials as it seeks rescue loans following the collapse of its banking industry, which had made loans equivalent to more than three times the country's GDP. The IMF has also been approached by Hungary and Serbia.

Neil Shearing, an economist with Capital Economics, said Hungary, the Baltic and Balkan states, and Turkey all appeared to be slipping towards a similar balance-of-payments crisis.

At an EU summit in Brussels yesterday Gordon Brown, President Nicolas Sarkozy of France, and others called for tomorrow's meeting of European leaders and George Bush at Camp David to be devoted to the redesigning of global capitalism. Sarkozy and the head of the European commission, José Manuel Barroso, are to lobby Bush to assent to a Bretton Woods II conference of at least 15 of the leading economies.

"The priority for us is the Saturday summit with the US president to prepare for the world summit which the world needs to recast the capitalist system, the financial and monetary system," said Sarkozy, who chaired the Brussels session.

The spectre of contagion from the western financial crisis reached South Korea this week, when credit rating agencies warned that seven banks were heavily reliant on short-term foreign funding which, if recalled, could wreak havoc on the local financial system.

Russia's rapid growth has spawned hundreds of banks, many of which have drawn funding from the international money markets. Several have been forced to seek government bail-outs.

Brian Coulton, global head of economics at Fitch Ratings, said that shockwaves hitting the Russian banks were likely to be dealt with comfortably by the mountain of foreign reserves built up by the Kremlin.

India, Brazil and China are not the brittle economies they once were and are expected to be among the least affected as the world economy slows.

"Taking emerging markets as a whole, the economic fundamentals are stronger than they were five years ago," said Coulton. "But that is very much an aggregate picture. There will be some economies that fare much worse than others."

Analysts at Standard & Poor's agree that while the emerging markets boom has run out of steam, even a violent exodus of western credit is unlikely to trigger domino sovereign debt defaults as once it might have done.

The burgeoning crisis has generated a rare mood of consensus in the EU behind swift and radical action.

Brown said he wanted the world summit to take place before the end of the year. Sarkozy called for a November summit and has signalled his preference for New York as the venue. But the Japanese prime minister, Taro Aso, sounded sceptical yesterday, telling parliament in Tokyo that the situation was not yet bad enough to warrant such a step.

Sarkozy admitted that there was no full agreement on how to proceed, but dismissed suggestions that a world summit should wait until a new US president was in the White House in January.

"We would otherwise have a meeting in the spring and that's much too late ... We must have a summit before the end of the year. Europe wants it. Europe will get it."

Shaky states

The creditworthiness of at least 10 countries around the world has more than halved in the last six months as the global credit crisis deepened, according to the credit data firm Markit. The cost of insuring against default sovereign debt issued by Ukraine with a face value of $10m, has jumped fivefold since April to $1.7m a year.

This indicates the markets believe there is a strong chance the government - in emergency talks with the IMF since Wednesday - could go bust, with creditors recouping little of their loans to the country. The likelihood of heavy losses is even greater for those holding Icelandic sovereign debt. The cost of insuring $10m of Icelandic debt is $1m a year, more than three times what it was six months ago.

Other countries with sharp deteriorations in their creditworthiness include Kazakhstan, Argentina, South Korea and Serbia. Meanwhile, despite the rash of bank bailouts in the UK, the cost of insuring $10m of government debt for this country remains relatively low, rising from $140,000 to $410,000 since April. This makes the cost of protecting UK sovereign debt against default almost exactly the same as the cost for buying similar protection on debt issued by McDonald's.

Labels: FINANCIAL CRISIS, RECESSION

posted by MrK @ 2:40 AM