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Wednesday July 11, 1:26 pm Eastern Time

Emerging Debt-Argentina tumbles, bleeding seen marketwide

By Hugh Bronstein

NEW YORK, July 11 (Reuters) - Argentina's financial crisis propelled emerging market sovereign bond holders to dump Latin American and Russian assets on Wednesday, ballooning spreads 56 basis points wider across the market.

``The market has been so negative on Argentina for so long that I'm a little hesitant to jump on the band wagon and panic. On the other hand prices are gapping down, so there must be some big sellers out there.'' said Hans Humes, a manager at Van Eck Emerging Market Funds.

Emerging market bond spreads shot out to 886 basis points over U.S. Treasuries, according to JP Morgan's Emerging Markets Bond Index Plus. Argentina's portion of the index widened 121 basis points to 1323, the widest level since Sept. 14, 1998, in the wake of Russia's debt default.

Neighboring Brazil widened 81 to 988.

Wider spreads reflect the perception of increased risk as measured against safe-haven U.S. Treasury bonds.

Argentina's peso-denominated interbank overnight lending rates hit 35 percent on Wednesday on investor uncertainty regarding Argentine liquidity after the government on Tuesday was forced to offer high interest rates in a domestic debt auction.

Amid widening country risk and escalating interest rates, Argentina auctioned $827.7 million in 91-day Letes Treasury bills at an annual yield of 14.01 percent, the highest rate for 91-day paper since 1996.

Increasing fear that Argentina may be forced to restructure its debt prompted a mass exit from emerging countries, such as Mexico and Russia, which had recently been star performers.

Russian spreads widened 51 basis points to 929 on Wednesday while Mexico widened 28 to 365.

``Buying Russia right now makes a lot of sense because they are not really tied in with Argentina. They're just coming off in sympathy,'' Humes said.

Mexico's currency weakened on Wednesday as investors opted for caution regionwide.

``I think Mexico is going to be a big underperformer through this Argentina problem,'' said Christian Stracke, chief Latin American debt strategist at Commerzbank Securities.

``You have a lot of unhedged speculative investors who assumed the peso would remain strong for a long time. So you will see those people who are long pesos and short dollars unwind those positions if Argentina continues to deteriorate,'' he said.

Argentina's Economy Minister Domingo Cavallo vowed on Wednesday to eliminate the budget gap from this month onward by cutting spending and fighting tax evasion and graft.

The government, facing a confidence crisis after three years of an economic slump, said it is unable to raise new credit to help pay debts and prepared to announce cuts of $1.5 billion to balance the budget in the second half of the year.

``We need fresh news to turn sentiment around. If we see a plan for bringing the deficit to zero it could help,'' one New York-based emerging debt trader said. ``But clearly for now the market is not giving Cavallo the benefit of the doubt.''

Stracke of Commerzbank said he expected the market to trade at the wider spread levels for the rest of Wednesday.

``People don't see an imminent threat of default or devaluation, so they are not going to sell. But no one has any inclination to buy because they are so far convinced that the medium term outlook is unsustainable,'' he said.

``The government must pull another rabbit out of its hat either through more multilateral financing or draconian measure to reign in the fiscal deficit. Short of those two, investors are pessimistic about Argentina's ability to pull itself out of this situation.''

-- (M@rket.trends), July 11, 2001

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Wednesday July 11, 12:55 pm Eastern Time

Fed-No comment on emergency Argentina meeting rumor

WASHINGTON, July 11 (Reuters) - A Federal Reserve spokesman on Wednesday declined to comment on rumors swirling in some financial markets that the U.S. central bank was to hold, or had held, an emergency meeting about Argentina's mounting financial woes.

Spokesman David Skidmore cited the Fed's oft-repeated policy of not discussing financial market rumors in declining to comment.

The Fed board did meet earlier Wednesday, but the gathering was previously scheduled and the agenda dealt with the central bank's upcoming monetary policy report to Congress and Regulation K, which governs some U.S. banks' overseas operations.

The meeting which, like most Fed board meetings, took place behind closed doors, was put on the schedule on July 3.

Worries over Argentina's fiscal situation intensified after a poorly bid debt auction on Tuesday. As one of the largest emerging market economies, investor worries about Argentina have had an effect on other emerging markets as well.

-- (M@rket.trends), July 11, 2001.