Markets fear global meltdown
By Paul Farrelly, City Editor
Sunday August 23, 1998
Jittery world markets are braced for a possible meltdown in Latin America this week as currency turmoil reverberates around the globe.
Stock markets in the world's major financial centres plummeted on Friday as emerging markets in South America suffered heavily in the fall-out from the financial crisis in Russia.
Fears, too, of a devaluation in Venezuela prompted the latest wave of selling as investors retreated to the safer havens of US, German and UK government bonds. President Clinton's missile attacks on Afghanistan and Sudan added to worldwide unease.
The intense pressure on Venezuela prompted widespread worries of a domino effect - such as the one in South East Asia last year - which would engulf Brazil, the region's biggest economy.
A Brazilian crash, analysts say, would destroy confidence in fast-growing emerging markets, causing a potential repeat of the last Latin American debt crisis in the Eighties.
This weekend, market watchers said further panic, or calm, depended on how Russia dealt with its own debt plight this week.
Tomorrow, Russian prime minister Sergei Kiriyenko is due to disclose how foreign owners of government bonds will be treated following the abrupt devaluation of the rouble and suspension of debt repayments last Monday.
"That, if not widely accepted, could trigger a broad-based default," said Carl Weinburg, chief economist at analyst High Frequency Economics in New York. "If that's not serious enough, investors in South America are concerned about a devaluation of the Venezuelan bolivar. And halfway round the world we've got Chinese objections to the weak yen."
Fears of huge Russian losses hit major European lenders hard, including Germany's Deutsche Bank and Switzerland's Credit Suisse First Boston, whose final bill was rumoured to be as high as œ1 billion.
The big US banks also joined the rout. Bigger falls, however, were seen in Madrid over the crisis in Latin America, to which Spanish banks are highly exposed.
Trading on the Brazilian stock exchange was halted on Friday as shares plunged through 'stop-loss' limits. Markets in Mexico, Argentina and Chile also took a nosedive.
"It was a bloodbath," said Peter West, chief analyst at BBV Securities, a Latin American specialist broker in London. "It's panic and the dumping of anything that smacks of being a risky asset."
Pressure on Venezuela has been heightened by low prices for oil, the country's major export, and concerns about elections in December. Populist opposition candidate Hugo Chavez, who led a coup attempt in 1992, is riding high in the polls. Bankers fear he might suspend the country's debt repayments.
Venezuela has $14bn of reserves to defend an overvalued currency, which is pegged to the dollar, but a wholesale sell-off by overseas investors may yet prompt devaluation.
Brazil's currency, the real, is also pegged to the dollar and, despite $70bn of reserves, is felt to be ripe for an assault by speculators immediately before or after that country's presidential elections in October.
"The real is fixed at the wrong level. It's at least 20 per cent too high. The balance of payment deficit is also very large. People are very nervous out there at the moment," said one senior executive at a leading British bank.
Until last week, Latin America had largely escaped the crisis, which started last year in Thailand and engulfed Indonesia, Malaysia and the Philippines in quick succession as speculators laid multi-billion bets on devaluation.
As in South America, all the currencies were pegged in one way or another to the dollar. Russian president Boris Yeltsin, too, vowed to maintain the rouble's fixed rate only to capitulate last week after blowing $3.8bn of aid from the International Monetary Fund on propping up the currency.
In New York on Friday, the Dow Jones index plummeted 284 points at one point on rumours of an emergency meeting of the powerful Federal Reserve bank, before closing 78 points down at 8,534.
The crisis wiped œ33bn off leading UK shares. The FTSE-100 index closed down 190 points at 5,477, its third largest fall ever.
The fall-out even hit Canada, whose currency fell to a record low against the US dollar on fears that Russia would raise money by dumping metals and minerals on the markets at cut prices. Canada's economy, like those of Russia and Venezuela, depends heavily on natural resources.
reports.guardian.co.uk |
