Thursday, 30 October 2008

Emerging markets become a trap for US banks

Citigroup Inc, Goldman Sachs and other US 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 down about 59 percent 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.

"The data shows that exposures ... are big enough to bring further pain to these big U.S. banks and brokers," Fox-Pitt analysts wrote in a research note last week.

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 percent in the third quarter.

oldman Sachs bought a stake in Industrial and Commercial Bank of China (ICBC) 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 percent 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.

Many investors and banks, however, thought emerging markets had come far enough along to be able to "decouple" from the United States, so banks rushed to increase business in emerging markets and bragged about their growing exposure.

"We're long the world, and heavily overweight in emerging markets as a company," Citigroup Chief Executive Vikram Pandit said at an investor presentation in May.

In June, Merrill Lynch Chief Executive John Thain said: "Our ability to grow our business over the next few years is going to be particularly focused on the emerging markets in the growing parts of the world," noting that Brazil, Russia, India, and China offered real opportunities.

Source: EconomicTimes

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