U.S. bailout unlikely to stem emerging market economy fears

By Isabel Versiani

NEW YORK (Reuters) - Emerging market investors braced for another roller-coaster week on Sunday as U.S. lawmakers appeared set to pass a $700 billion (381.4 billion pound) financial rescue package in the coming days but analysts said the world economy could still face a deep economic downturn.

Even if the Washington bailout succeeds in calming down financial markets, investors should remain averse to risky assets in the medium-term, while the global credit crisis takes its toll on the real economy.

"Once the package is passed, markets will likely rally for a few days before the focus moves back to the economy," Beat Siegenthaler, chief strategist for emerging markets at TD Securities, wrote in a research note.

"We think emerging markets assets will then be driven by the weaker global growth outlook," he added.

Emerging markets posted losses last week as uncertainty about the approval of Washington's bailout package persisted.

The Morgan Stanley's MSCI index for emerging equity markets fell 2.6 percent while emerging debt spreads over U.S. Treasuries widened 24 basis points on the JPMorgan EMBI+ index.

U.S. Congressmen were still finalizing on Sunday the bailout deal, which includes the creation a $700 billion government fund to buy bad debt that has been choking the financial system, but a timetable for the vote was still uncertain.

Once financial markets are stabilized, analysts say, countries will still have to deal with a slowing global economy, which may lower the price of commodities that have been supporting trade surpluses in many emerging nations.