Emerging markets were battered by a wave of selling yesterday amid growing investor concern about the financial crisis in Argentina. Bonds, equities and currencies in emerging markets around the world extended losses of recent days in what traders described as the worst turbulence since the crisis of 1997-98.
The trigger for the latest bout of selling was Argentina's government bond auction on Tuesday, at which it was forced to pay 14 per cent interest on three-month paper. Investors have been demanding an increased premium for the risk that Argentina's currency peg to the US dollar will collapse or that the government will default on its debt.
Argentina's government has repeatedly said it will not default on its debt or devalue the peso.
Yesterday the Brazilian real lost 2.3 per cent to hit a record low of 2.549 against the dollar, leaving it some 30 per cent below the level it started the year, and Brazilian benchmark bonds fell 3.4 per cent.
The Mexican peso, which had seemed relatively immune, fell 1.5 per cent, from 9.14 pesos to 9.28 pesos to the dollar. The Turkish lira fell almost 5 per cent to TL1,380,000 to the dollar, while Turkish bonds fell 4.5 per cent. In Argentina, the Merval stock index fell 6.6 per cent, while benchmark bond prices fell 5 per cent.
The crises in Argentina and Turkey had until recently little effect on other emerging markets. Now contagion is battering other countries in Latin America, eastern Europe and Asia.
"Emerging markets have not looked in worse shape since 1998," said Mr John Davitte of Idea-global, the consultancy.
Institutional investors have tried to cut their exposure to Argentina during the last year, as the country's finances have come into question. But Argentine debt accounts for 20 to 25 per cent of all tradeable emerging market debt. Investors are selling other assets to cover losses in Argentina and have become more averse to risk because of the worsening global economy.
The slowdown in the US has had particularly severe effects in Asia. Yesterday the Taiwan dollar fell to a three-year low against the dollar because of fears of falling exports to the US.
