Emerging markets turmoil engulfs UK listed banks

Standard Chartered and HSBC see share prices slump <br> IMF plans emergency aid to prop up governments

The spread of financial turmoil to emerging markets caused investors to flee the shares of HSBC and Standard Chartered, the UK banks previously seen as most resilient amid theongoing credit crisis.

Debt markets are signalling thatinvestors fear a blow-up of one or more emerging economies, and the International Monetary Fund was working on an emergency plan yesterday to prop up governments facing a cash crunch.

The global sell-off in equities was particularly pronounced in severaldeveloping markets, compounding problems in what until recently hadappeared to be one section of the global economy that might escape the worst of the crisis.

HSBC fell 13.5 per cent to a five-year low of 696p, while Standard Chartered dropped 16 per cent to 758p, its lowest since April 2002. The banks' big exposures to fast-growing Asian and emerging economies had helped insulate them from the financial storm hitting Western financial markets – until now.

Morgan Stanley analysts cut their earnings estimates for the two banks, citing slowing growth in Asia, where HSBC makes over half its profit and Standard Chartered gets about 80 per cent of earnings. Both banks have big businesses in Hong Kong, whose economy is slowing sharply. Standard Chartered is also a major player in South Korea, where the government was forced to prop up the banking system last week.

"We question how long the [HSBC] shares can tread water in the face of falling earnings and increased pressure on capital, and we think the dividend is exposed," Morgan Stanley said.

Both HSBC and Standard Chartered have strong capital positions compared with UK rivals. They also more than cover their lending with deposits, unlike competitors who rely on shaken wholesale markets. But with the crunch hitting emerging economies hard, concerns are increasing that Asia could see a repeat of the financial crisis that devastated the region 10 years ago.

Shares in Santander, the owner of Abbey in the UK, also fell heavily, losing 10 per cent. Spain's biggest bank has until now not only weathered the crisis but taken advantage of it,mopping up Alliance & Leicester and Bradford & Bingley's deposits business. However, Santander is a big player in Latin America, where fears about sovereign debt defaults are rising after Argentina nationalised its private pension system to give it reserves that it can use in case it can't refinance its debts on the global markets. HSBC also has a large Latin American business, particularly in Brazil and Mexico.

The Brazilian stock market was among those down sharply yesterday, falling a further 8 per cent, as the central government struggled to prop up its currency, the real, which has already lost a third of its value against the US dollar this year. On Thursday, the government said it would put a quarter of its foreign reserves on the line to defend the real. Other emerging market governments that have been trying to boost their plunging currencies include Russia and Mexico. Trading on the Russian stock exchange was once again halted yesterday afternoon, because of fears over its economy now that oil prices have collapsed.

The cost of insuring emerging market debt, as measured by credit default swap spreads, has soared to a level not seen since the brief financial panic of autumn 2002. Economists predict that a weakening global economy will crimp demand for their exports, especially commodities, which have already plunged in price. A sharper-than-expected fall in Chinese economic growth this week snuffed out hopes that emerging markets might now be big enough to continue growing strongly without Western demand.

Making matters worse, institutional investors overseas, who had put money into emerging markets during the economic boom, are now pulling back. The phenomenon has been particularly acute among hedge funds, many of which have been locked in a downward spiral of widening losses and investor redemptions since the Lehman Brothers collapse triggered the market meltdown.

John Lonski, the chief economist at Moody's Investors Service in New York, said: "It's the old cliché of a butterfly flipping its wings somewhere in Africa and eventually changing the air pressure so that we get a nasty hurricane in North America. It is hard to argue that if the developed economies, which are the principle markets for their products, slow sharply, emerging market countries won't be adversely affected."

The tumult in emerging markets has brought the IMF – the global lender of last resort – back into the spotlight. Yesterday, it was debating plans to relax the rules that usually govern its loans and which often include an insistence on market-oriented reforms. The fund has $200bn to lend and countries as disparate as Hungary, Ukraine, Iceland and Pakistan have all approached it to help tide them over during the chaos in credit markets, where they would raise debt in more normal times.

Iceland, whose three biggest banks have collapsed with more liabilities than its government could shoulder, said it had won agreement for a $2.1bn loan from the IMF, which could be rubber-stamped within ten days.

Meanwhile, Ban Ki-moon, the United Nations secretary general, called for more action. He said the financial crisis "compounds the food crisis, the energy crisis, the crisis of development in Africa. It could be the final blow that many of the poorest of the world's poor simply cannot survive."