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To: TobagoJack who wrote (51161)	6/22/2004 7:11:28 PM
From: elmatador	Read Replies (1) \| Respond to of 74559

Emerging markets uneasy over Fed. Time to harvest now, Jay. Every ten years it happens. Emerging markets uneasy over Fed By Päivi Munter Published: June 22 2004 19:53 \| Last Updated: June 22 2004 19:53 The prospect of an imminent upturn in US interest rates is fuelling uncertainty in emerging markets, although few expect the tightening cycle to spark a full-blown debt crisis. The US Federal Reserve is expected to begin raising rates at its monetary policy meeting next week, which would end a period of exceptionally easy money. Although the Fed has been anxious to warn the markets that the cost of borrowing might rise, the bonanza in emerging market debt over the past three years has left investors uneasy. With US rates at a 46-year low, they have been able to borrow for next to nothing in order to invest in high-yielding but risky assets, which leaves the market vulnerable to hefty selling when the conditions change. The fear of higher US rates already prompted heavy selling in emerging market debt this spring, making April the worst month for the asset class since July 2001. This followed a three-year rally in the paper that brought yield spreads over US Treasuries to their lowest since 1997. Paul Luke, chairman at UK hedge fund Convivo Capital Management, said: "I liken the prospect of higher US rates to an appointment with the dentist. You may know that you're in for root canal work, but it will still be painful." Arnab Das, head of emerging markets research at Dresdner Kleinwort Wasserstein noted: "Emerging market debt is vulnerable to this turn of cycle, given the long history of credit crunches precipitated by US tightening." An upward turn in US interest rates sparked a number of high-profile emerging market defaults in the 1980s and early 1990s, when interest rates were substantially higher than they are now. A move from 11 per cent to 19 per cent in US rates between 1980 and 1981 helped to create credit crises in Brazil, Argentina, Mexico, Venezuela and Ecuador in 1982/83. Mexico's Tequila crisis coincided with the last sharp tightening move by the Fed. However, analysts expect the coming upward cycle in US rates to be more moderate. They expect the Fed's upward room for manoeuvre on rates will be limited by the high level of public and consumer indebtedness in the US. "The current account and fiscal deficits in the US are alarming," said Raphael Kassin, head of emerging market debt at ABN Amro Asset Management. "This is likely to weigh on the dollar, which makes it easier for emerging market governments with external debt to service it." Emerging market governments have generally improved their fiscal balances and adopted more flexible monetary policies since the Asian, Russian and Argentine crises. This makes them less exposed to global market sentiment for debt refinancing. According to JP Morgan, 41 per cent of the benchmark EMBI Global Diversified bond index now consists of investment grade instruments, compared with just 5 per cent 10 years ago. However, there still remain countries with a heavy burden of short-term external debt. These, analysts say, include Turkey and Brazil, both speculative-grade rated large borrowers. Brazil this week sought to pre-empt the expected rise in borrowing costs next week, raising $750m in a five-year floating-rate note issue. Since the late 1990s, emerging market debt crises have come during periods of steady or falling US rates, but the events of 1994 left an indelible fear of a repeat among many investors. The heightened uncertainty has been reflected in JP Morgan's latest client survey for May. The bank said the big fear was that US inflation could accelerate more than expected, forcing the Fed to raise rates more steeply than forecast. "If the market believes the Fed is behind the curve on inflation, then emerging market bonds could fall sharply," said Jonathan Bayliss, head of quantitative strategy at JP Morgan. "But investors are much more prepared for higher rates than at the beginning of the previous tightening cycles."