Emerging-Market Stocks Tumble as Credit Risk Surges (Update3)

By Fabio Alves and Denis Maternovsky
Sept. 16 (Bloomberg) -- Emerging-market stocks plunged the most in 11 years, currencies fell and the cost of insuring developing-nation bonds surged as rising lending rates and tumbling commodities prompted investors to sell riskier assets.
Every emerging stock market in MSCI indexes retreated, except Brazil, Argentina and Indonesia. Russia's Micex Index fell the most since Bloomberg began tracking the measure in May 2001, led by financial companies OAO Sberbank and OAO VTB Group, before trading was suspended. South Korea's won dropped the most in a decade. Argentina's five-year credit-default swaps rose to the highest since at least June 2005.
The MSCI Emerging Markets Index fell 4.7 percent to 786.99 at 4:17 p.m. New York time, the lowest level since October 2006. The measure earlier tumbled 6.3 percent for the biggest drop since October 1997. The measure lost 34 percent in 2008 before today, compared with a 19 percent decline for the Standard & Poor's 500 Index.
Banks' borrowing costs in dollars more than doubled to the highest since 2001 after credit downgrades of American International Group Inc. and the collapse of Lehman Brothers Holdings Inc. led banks to hoard cash. Crude oil, copper, silver and sugar tumbled on concern losses in the financial system will further curb global economic growth and cut demand for raw materials.
`Very Poor' Sentiment
``Sentiment is very poor,'' said Nick Field, who helps oversee $27 billion in emerging-market equities at London-based Schroders Plc. ``Emerging stocks are suffering because of the funding problems in the developing market banking system and also because people have to cover losses elsewhere and they're selling whatever stocks they can.''
Russia's Micex index plummeted 17 percent to 881.17, dragged down by a 28 percent plunge in Sberbank and a 31 percent decline in VTB Group. Korea's Kospi index fell 6.1 percent, while Czech's PX index slumped 5.6 percent.
Energy shares, including Russian oil producers OAO Gazprom and OAO Rosneft, declined after crude tumbled more than $3 a barrel. Gazprom, the world's biggest natural-gas producer, lost 18 percent to 158.41 rubbles. Rosneft, Russia's largest oil company, sank 22 percent to 132.20 rubbles.
In Latin America, Brazil's Bovespa reversed earlier losses, rising 1.7 percent, led by Petroleo Brasileiro SA and miner Cia. Vale do Rio Doce. Brazil's real also rebounded from its lowest level since November, ending the day little changed.
AIG Speculation
Brazilian stocks and the real rallied on speculation the U.S. Federal Reserve may rescue AIG from collapse. People with knowledge of the talks between AIG and the government are ``cautiously optimistic,'' said the person, who declined to be identified.
The MSCI Latin America index rebounded from a year-low in early trading, gaining 0.8 percent. Argentina's Merval rose 0.6 percent. Chile's Ipsa fell 1.7 percent.
Petrobras, Brazil's state-controlled oil company, surged 5 percent to 31.30 reais. Vale, the world's largest iron-ore producer, gained 3.8 percent to 34.88 reais.
Cosan SA Industria & Comercio, the world's biggest sugar- cane processor, lost 9.6 percent to 16.50 reais as sugar dropped 1.2 percent in New York trading.
South Korea's won fell 4.4 percent against the dollar in Seoul. Chile's peso increased 1.7 percent after earlier falling to its weakest since February 2007.
Yield Gap
The extra yield investors demand to own emerging-market dollar bonds instead of U.S. Treasuries widened 9 basis points to 3.89 percentage points, according to JPMorgan Chase & Co. Ecuador's bonds were among the biggest decliners, with the country's yield spread soaring 58 basis points to 9.1 percentage points, JPMorgan data show.
The cost of insuring bonds in emerging markets surged. Argentina's five-year credit-default swaps rose above 1,000 basis points as concern that New York-based AIG may collapse eroded demand for all but the safest investments.
``Right now the market has taken on a life of its own, and there is no telling at what point this knife stops falling,'' said Ronald Smith, chief strategist at Alfa Bank in Moscow. ``The bottom may not be found until some time in October, and the rally may not start until December or even early next year.''