Credit Fallout: Panic Grips Hong Kong and Kazakhstan

Visions of Britain’s Northern Rock plc trampled Hong Kong on Wednesday as Bank of East Asia’s stock price continued to plunge on fears of a growing liquidity problem. Thousands of panicked-stricken depositors queued at bank branches across the city as customers withdrew funds.

The HKMA, or Hong Kong Monetary Authority, insures a paltry HK$100,000 on individual customer deposits or $12,900. That low level of deposit protection barely offers much reprieve for the wealthiest clients at Bank of East Asia, one of the territory’s largest banks. The bank has 91 branches in Hong Kong.

Bank of East Asia denies it has a liquidity problem and claims operations are running smoothly. That indeed might be the case but banks are infamous for talking positively when the ship is still sinking; Both Lehman Brothers and Bear Stearns were also touting strong capital ratios just days before their demise. Bank of East claims it lost several hundred million HK$s on securities tied to Lehman Brothers and AIG.

In 2008, the Hong Kong Hang Seng Index has crashed 32%.

The credit crisis, shortly entering its fourteenth month, is also rapidly spreading to emerging markets.

Credit spreads between emerging market bonds and Treasury debt continue to widen this month at 400 basis points, well above the all-time lows of roughly 180 basis points in July 2007. Some countries are also in the midst of serious funding problems and relying on state coffers to provide capital assistance.

In addition to Russia, which saw its banks scramble for state assistance to fund liquidity requirements following a collapse in share prices earlier this month, Kazakhstan is now contending with its own funding crisis.

Kazakhstan’s government on Wednesday agreed to help its banks by promising to purchase up to $6 billion dollars in non-performing loans as bank credit quality continues to deteriorate. Similar to the proposed Paulson bailout plan unveiled last week, Kazakhstan will create a fund to buy toxic assets that are threatening its financial system.

I’m still very bullish on the long-term prospects for emerging markets. That’s because I remain a commodities bull. The largest emerging markets, including Brazil and Russia, should continue to prosper despite short-term travails spreading from Wall Street. The American bail-out is ultimately hugely inflationary and will result in another major boom for raw materials. Combined with a fresh round of liquidity (interest rate cuts), courtesy of The People’s Bank of China, consumption of commodities should increase over the next 12 months by Chinese manufacturers.

Year-to-date, the MSCI Emerging Markets Index has plunged a cumulative 33% -- its worst calendar year performance since 2001.

Average rating
(0 votes)