• ACI Russia

08/06/1998 13:18:08 Emerging debt off, Russia hits historic lows

By Diane Craft

LONDON, August 6 (Reuters) - Emerging debt prices were sharply weaker on

Thursday, with Russia hitting fresh historic lows as investors were once again

spooked by a market that smacks of risk, analysts said.

They said a sharp drop overnight in Hong Kong's Heng Seng stock index to

3-1/2 year lows and heightened concerns about another tumble on Wall Street kept

investors on the sidelines.

"A lot of people don't want to be in the emerging markets at the moment

because they fear that if the Dow goes down, emerging markets will go down at

least as much," said Nigel Rendell, emerging market strategist at Santander

Investment Bank.

By 1245 GMT, Russian PRINs <RUSPRIN=RR> were off 1-7/8 at 38-1/4 bid from

New York's closing levels but just up from record lows of 38 bid reached at 1115

GMT. Russian IANs <RUSIAN=RR> were 1-1/2 weaker at historic lows of 46 bid.

In the broader market, Brazilian "C" bonds <BRAZILC=RR> were 1-1/4 lower at

73 bid, Venezuelan DCBs <VENDCB=RR> were 1-1/8 at 74-3/8 bid and Bulgarian IABs

<BULIAB=RR> were 1-1/2 weaker at 69-3/4 bid.

Market rumours that a large U.S. bank was struggling because of heavy

exposure to Russia debt also hurt prices.

"It would make sense because a lot of banks are struggling because they are

tied to Russia," said one market analyst.

"The money going into emerging markets has come out and is

not going to return for the time being," he added.

Indeed, the investor base for the emerging debt market has shrunk over the

past year because of the associated risks.

"There is a far smaller pool of potential buyers and it means that on a

purely supply demand basis, even if prices look fundamentally cheap, you still

need to sell it to somebody," said Neil Lockwood, analyst at ANZ Investment Bank

in London.

"Irrespective of whether there appears to be good value, the urge to stay

within emerging markets with the risks perceived as inherent means that people

are either staying on the sidelines or have decided to put money in safer havens

such as U.S. Treasuries," he said.

Even though analysts agreed there was no direct fundamantal link between the

Dow and the emerging debt markets, they said investor aversion to risk was

dominating their decisions.

The overriding concerns about Asia and the U.S. stock market were among the

main concerns.

"It is sentiment-driven and people feel that the Dow is risky at the moment

and if the Dow is risky then emerging markets have to be twice as risky so they

are keeping on the sidelines," said Rendell.

"People are concerned about what happened in Hong Kong overnight and they

are thinking about what the repercussions in the Dow will be this afternoon,"

Lockwood said.

Other factors weighing on the market included weak world commodity prices

and ongoing fears about the Japanese yen and the potential knockon effect to the

Chinese currency.

Concerns a weaker yen could trigger a devaluation of the Chinese yuan and

other Asian currencies have plagued emerging markets for months and analysts

said those fears are likely to linger until a brighter picture starts to emerge

from Asia.

"Emerging markets both on the debt side and the equity side are seen as high

risk and low reward short-term," said Rendell.

"I don't think that will change until we see the Dow stabilise and better

news coming out of Asia," he added.

((Diane Craft, London Newsroom +44 171 542 5110, fax 583 7239,


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