The Next Stage Of The Meltdown

It's looking to be a race to see which one collapses first: Emerging markets in countries like Russia, Hungary, South Korea, Brazil and Mexico...

Developing nations' borrowing costs neared a six-year high after Standard & Poor's threatened to cut Russia's debt ratings as the global credit crisis deepened.

The extra yield investors demand to own emerging-market government bonds instead of U.S. Treasuries surged 39 basis points to 8.41 percentage points, the biggest since November 2002, according to JPMorgan Chase & Co.'s EMBI+ index. The annual cost to protect Russia's bonds from default soared as S&P lowered Russia's ratings outlook to negative on concern the cost of the government's bank rescue will climb.

Russia has committed as much as 15 percent of its gross domestic product to propping up banks, including a $50 billion credit line to development bank Vnesheconombank. Russia's international reserves, the world's third largest, declined by $14.9 billion last week after the central bank sold currency to support the ruble as investors pulled money out of the country.

``There is now no safe haven globally other than a deeply indebted U.S. government,'' said Jim Reid, head of fundamental credit strategy at Deutsche Bank AG in London. ``The events of the last few days are categorical evidence of the globalization of the credit crunch and its subsequent problems.''

Ex-Soviet republic Belarus added to requests from Iceland, Pakistan, Hungary and Ukraine for at least $20 billion of emergency loans from the International Monetary Fund as the financial crisis leaves nations unable to repay their debt. Belarus has requested ``no less than'' $2 billion and may also seek funds from central banks and commercial banks in other countries, said central bank spokesman Anatoly Drozdov.

Argentine Nationalization

In Argentina, lawmakers are battling to block President Cristina Fernandez de Kirchner from using $29 billion in nationalized pension fund assets to repay debt as the government struggles to avert its second default this decade. Fernandez announced plans to take over private pension funds on Oct. 21, sparking a rout in the country's financial markets. Argentina last seized retirement savings in 2001, before it reneged on $95 billion of debt and triggered a global selloff.

The yield on Argentina's 8.28 percent dollar bonds due in 2033 jumped 4.11 percentage points, to 33.44 percent at 11:44 a.m. in New York, according to JPMorgan. The bond's price fell 3.5 cents on the dollar to 20 cents, leaving it down almost 17 cents this week.

``It's becoming a mess in emerging markets,'' said New York University professor Nouriel Roubini. ``There are about a dozen emerging markets that are now in severe financial trouble.''

...or if the next disasterous collapse will be hundreds of hedge funds.

Hundreds of hedge funds will fail and policy makers may need to shut financial markets for a week or more as the crisis forces investors to dump assets, New York University Professor Nouriel Roubini said.

``We've reached a situation of sheer panic,'' Roubini, who predicted the financial crisis in 2006, told a conference of hedge-fund managers in London today. ``There will be massive dumping of assets'' and ``hundreds of hedge funds are going to go bust,'' he said.

Group of Seven policy makers have stopped short of market suspensions to stem the crisis after the U.S. pledged on Oct. 14 to invest about $125 billion in nine banks and the Federal Reserve led a global coordinated move to cut interest rates on Oct. 8. Emmanuel Roman, co-chief executive officer at GLG Partners Inc., said today that as many as 30 percent of hedge funds will close.

``Systemic risk has become bigger and bigger,'' Roubini said at the Hedge 2008 conference. ``We're seeing the beginning of a run on a big chunk of the hedge funds,'' and ``don't be surprised if policy makers need to close down markets for a week or two in coming days,'' he said.

Both are poised to go. We're nowhere near out of the worst of the financial crisis yet. It's just beginning. If emerging markets collapse into mini-depressions, or the mighty hedge funds fold by the dozen, the pain we're seeing right now in the markets will be a fevered dream of peace compared to the chaos that will ensue.

And honestly, the question is when, and how badly, will both of these global linchpins disintegrate?

People think we're through the worst and that we've avoided a depression or even a bad recession for the most part, people are looking forward to the next "bear market rally". You're smarter then that, I'm hope...the worst is still to come.