Investor fears over the risk of many emerging market countries’ defaulting on their debt has risen sharply as Iceland’s financial collapse has hit sentiment, discouraging funds from investing in these economies. The market is pricing the risk of default for countries such as Pakistan, Argentina, Ukraine and Iceland at 80% or higher as their banking systems come under increasing pressure amid the credit crisis. Trading in credit default swaps indicated expectations that Pakistan has a 90% chance of defaulting on its debt. CDS spreads on Pakistan, which is haemorrhaging foreign exchange reserves to prop up a weak rupee, have risen to a record 3,026bp, or a cost of more than $3m to insure $10m of debt over five years. This is a threefold jump since the collapse of Lehman Brothers on Sept 15. Other countries facing difficulties include Kazakhstan and Latvia because of their highly leveraged banking systems, and Turkey and Hungary, which are running very high current account deficits. Hungary was earlier promised financial help by the IMF after its currency, the forint, hit a two-year low against the euro, although it rebounded.

This entry was posted by Gwen Robinson on Tuesday, October 14th, 2008 at 5:24 and is filed under Capital markets. Edit this entry.