Hard times seen for emerging Europe international debt

By Carolyn Cohn - Analysis

LONDON (Reuters) - Emerging European sovereigns and banks are likely to be shut out of the international debt markets next year as funding costs soar, forcing borrowers to tighten budgets and focus on local markets.

But for the hardier emerging market investor, scarcity value may make any issues that do launch more attractive.

Over $16 billion in emerging European, Middle East and South African sovereign bonds will be redeemed by the end of 2009, according to Deutsche Bank estimates, and it will be hard for borrowers to issue new debt in international markets.

Falling domestic exchange rates, a clogging of the channels to international capital and potentially stringent policies required in International Monetary Fund packages will scupper sovereign international bond issuance, analysts say.

"I am fairly certain it won't be done in external markets. Some of it will be done by local markets, and some by spending less," said Marc Balston, managing director of emerging markets strategy at Deutsche Bank.

Emerging markets, which some analysts were describing only a year ago as decoupled from global sub-prime woes, have been increasingly tangled up in the global financial crisis.

With investors fearful of economic collapse and international bail-outs lined up for once top-tier emerging economies like Hungary, emerging market debt yields have soared.

Emerging sovereign debt spreads, as measured by JPMorgan's EMBI+ index, rocketed from less than 300 basis points over U.S. Treasuries in early August, just before the outbreak of military conflict between Russia and Georgia, to as much as 900 last week, the widest level in six years.