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Emerging markets become a trap for U.S. banks

Citigroup Inc., Goldman Sachs and other U.S. banks had hoped emerging markets would take some of the sting out of the credit crisis, but instead they seem to be worsening the pain.

Emerging markets have been battered along with other financial markets, leaving the main index of emerging markets stocks MSCIEF down about 59% so far this year while sovereign debt has weakened to 2002 levels. That means banks that touted their emerging markets strength in the second quarter will likely be writing down loans and recording credit losses in the fourth.

Citigroup, which gets one third of its revenue from emerging regions, has been setting aside hundreds of millions of dollars to cover spiking credit losses in Brazil and Mexico. Its revenue from Latin America dropped 23% in the third quarter.

Goldman Sachs bought a stake in Industrial and Commercial Bank of China in 2006 that was valued at $7.1 billion at the end of August. ICBC's shares in local currency terms have fallen by about 40% since then.

For about a year, it looked as if the financial crisis would mainly slam the United States and parts of Europe while emerging markets enjoyed a steady flow of dollars from record-high commodities prices led by oil, gold and copper.

But even with windfalls from commodities, the strength in markets like Brazil, Russia, India and China seemed unusual given that when developed markets weaken, emerging markets generally become weaker still.

Emerging markets companies that issued debt will likely have trouble refinancing when their bonds mature, which is apt to be exacerbated by the strengthening U.S. dollar.

These companies face debt maturities of $450 billion in notes, bonds and loans next year, and another $487 billion in 2010, according to Dealogic. Market conditions have made credit scarce and refinancing difficult.

Source: Reuters
Date: 30.10.2008 [204]

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