08/21/1998 06:47:58 Emerging mkt debt sharply lower on liquidations
By Apu Sikri
NEW YORK, Aug 20 (Reuters) - Emerging market debt prices
dropped sharply Thursday in what traders described as
near-panic selling triggered by the failure of some hedge funds
to meet margin calls.
Venezuelan debt led the decline amid general market
speculation that the country may be forced to devalue its
currency -- the bolivar.
Venezuelan government officials emphatically denied any
intent to devalue but that was largely ignored by market
participants. Most governments that have authorised a
devaluation in recent months have denied any such plans till
the last possible minute.
Venezuela's global bonds due 2018 were down as much 14
points, traders said. Overall, Venezuela's bonds lost 7.6
percent of their value, according to the J.P. Morgan Emerging
Markets Bond Index.
There were sharp declines across the board. For instance,
Brazil's benchmark "C" bonds <BRAZILC=RR> lost four points on
Some large U.S. hedge funds weren't able to meet margin
calls Thursday, prompting dealers to liquidate their positions,
Most of the losses on these hedge funds come from exposure
to Russia, Venezuela and some other emerging markets, traders
said. The health of these investors will depend to some extent
on the debt restructuring package to be announced by Moscow
next Monday, traders said.
Among the banks that have seen their shareholder value
directly hurt by exposure to Russia is Credit Suisse First
Boston. A sharp decline in its stock early Thursday prompted
officials at the company's headquarters in Zurich to say that
the exact impact of the loss wouldn't be known until the debt
restructuring package to be announced Monday.
Some traders said that too much is being made of the
planned GKO restructuring. No matter how the debt is
rejiggered, it's likely to extend maturities on short-term debt
and then the question still remains as to whether Russia can
make good on the restructured debt.
Analysts said they're given to understand that there could
be a meeting between Russian government officials and bankers
on the large exposure in currency forward contracts next
While much has been made of the potential losses on GKOs,
no attention has been paid to maturing forward contracts that
come due largely between now and October, traders said..
Traders estimate the size of the rouble forward market is
about 10 billion in notional amount.
"There is a huge amount of exposure in the forwards," said
Kimerly Guerrero, portfolio manager at Travelers Investment
Group, a unit of Travelers Corp. "They (forwards) should be
part of the (restructuring) package, but I don't think they
will be," she said.
Analysts said that any meeting to discuss forwards would
only address on-shore contracts.
Russian bond prices dropped only one to two points as most
of its outstanding debt is already trading at default levels.
"The mood is very grim in the market," said Hari Hariharan,
portfolio manager at Santander New World Investments. With the
yield-to-maturity on Russian bonds at around 35 percent,
investors are asking why Latin American debt should trade at
yield-to-maturity of around 10 percent to 13 percent, said
Many of these countries are dependent on external debt and
some countries like Brazil have a large fiscal deficit.
(( -- N.A. Treasury Desk; 212 859-1562;