LONDON (Reuters) - Emerging European sovereigns and banks are likely to be shut out of the international debt markets next year as funding costs soar, forcing borrowers to tighten budgets and focus on local markets.
But for the hardier emerging market investor, scarcity value may make any issues that do launch more attractive.
Over $16 billion in emerging European, Middle East and South African sovereign bonds will be redeemed by the end of 2009, according to Deutsche Bank estimates, and it will be hard for borrowers to issue new debt in international markets.
Falling domestic exchange rates, a clogging of the channels to international capital and potentially stringent policies required in International Monetary Fund packages will scupper sovereign international bond issuance, analysts say.
“I am fairly certain it won’t be done in external markets. Some of it will be done by local markets, and some by spending less,” said Marc Balston, managing director of emerging markets strategy at Deutsche Bank.
Emerging markets, which some analysts were describing only a year ago as decoupled from global sub-prime woes, have been increasingly tangled up in the global financial crisis.
With investors fearful of economic collapse and international bail-outs lined up for once top-tier emerging economies like Hungary, emerging market debt yields have soared.
Emerging sovereign debt spreads, as measured by JPMorgan’s EMBI+ index, rocketed from less than 300 basis points over U.S. Treasuries in early August, just before the outbreak of military conflict between Russia and Georgia, to as much as 900 last week, the widest level in six years.
The most recent emerging European sovereign issuer to venture into the international debt markets was Turkey, which issued a $1.5 billion 10-year bond with a yield of 7.05 percent in early September. The bond was trading at a yield of 12.85 percent on Friday.
Many Eurobonds mooted for this year, from Ukraine to Kenya, have not made it to the international market at these expensive levels. Worries that emerging market borrowers will have difficulty refinancing their debt have added to emerging market asset falls in recent weeks.
Borrowers such as Russian state railway monopoly Russian Railways have switched funding plans to the local market, where investors are seen as more loyal and there is no currency risk.
Emerging European borrowers will have more difficulties than those in Latin America or Asia, analysts say. There are larger amounts of debt coming due in eastern Europe and greater concern over once-overheating eastern European economies going the same way as Iceland, which has suffered a collapse in its banking sector and a freezing up of its markets.
Countries like Hungary and Poland, which have borrowed heavily in euros and yen, are looking exposed, as local currencies weaken.
“The biggest rollover risk could be from Japanese investors,” JPMorgan analysts said in a client note.
“Samurai bonds for both Hungary and Poland mature in June next year for 400 million euros and 500 million euros. Forint/yen … has dropped 14 percent since July.”
BANK WOES
In the past few years, international banking sector debt has overtaken sovereign debt in volume in countries like Kazakhstan and Russia, but analysts say it is likely to be even harder for banks to come to the market.
Banks have been at the forefront of the global crisis, with several high-profile collapses or near-collapses. Their problems also make it hard for local firms to access finance.
“It is inevitable that we will see corporate default ratios coming up massively,” said Luis Costa, emerging debt strategist at Commerzbank. “Corporate default ratios are running at about 3-5 percent in emerging markets”, he added, saying they could rise to double digits.
Emerging market banking debt would have to compete, and would likely fail to do so, against government-guaranteed debt from developed markets.
Barclays and HBOS have each raised 3 billion euros in bonds with a UK government guarantee this month.
Over $5 trillion has been committed around the world to bailing out the banking sector, with France, Germany and the UK guaranteeing around 1 trillion euros ($1.3 trillion) in bank debt over the next five years.
Kazakhstan and Russia have also acted to shore up their banks. But with the cost of insuring Kazakhstan and Russian sovereign debt against default soaring to distressed levels around 1,000 basis points in the credit default swaps market, the guarantees do not carry much weight.
“Some banks may end up under some kind of guarantee — Russia could do that,” Balston said.
“But Russia is traded at 1,000, it’s not going to help a bank come to market.”
However, sharp rises in markets this week as a result of decisive action by the Federal Reserve and the IMF do provide hope further into next year for sovereign and bank borrowers, some analysts say.
Elisabeth Gruie, emerging markets strategist at BNP Paribas, sees the absence of international emerging debt issuance as likely to be short-lived.
“In the short term, it’s not going to be possible to issue. Once trust is restored, the system will pick up again.”
