• ACI Russia

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

the day.

Some large U.S. hedge funds weren't able to meet margin

calls Thursday, prompting dealers to liquidate their positions,

traders said.

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;

apu.sikri@reuters.com ))

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