NEW YORK (
) -- It is not easy for banks to operate in emerging markets. This week's political turmoil in Egypt -- and the potential for the conflict to spill over into Middle East and North Africa -- reveals the risks involved when banks dip their toes in developing economies.
The relatively strong position of emerging-markets since the financial crisis has created a hot market that has caused U.S. banks to expand in areas such as Latin America, Asia, North Africa and the Middle East.
While investments in these areas may be lucrative, they also tend to be risky. Emerging markets are fraught with regulatory issues, white collar theft, currency devaluations and the potential for sovereign default.
History has illustrated that banks often lose money in emerging markets due to political turmoil. Here's a timeline looking at emerging market investments over the years and the losses they can create for banks and bank investors.
Mexico's Sovereign Default
"Sovereign states don't go bankrupt," said
CEO Walter Wriston. Wriston wound up eating his words after when the Latin American debt crisis, also known as Mexico's Sovereign Default of 1982, threatened the global banking industry.
Latin American countries had borrowed aggressively in the 1970s and 1980s for infrastructure projects. The crisis reached an apex when Mexico's Finance Minister Jesus Silva-Herzog said that his country would not be able to meet its payment due-dates for billions in loans.
During the crisis Latin American incomes dropped, economic growth stagnated, unemployment rose, and local currencies became inflated and interest rates shot up globally. There were several trial solutions, including the International Monetary Fund's plan to lend more to the countries; the 1986 Baker Plan, which promised billions of funds in exchange for market-oriented reforms such as the reductions of trade barriers and tax reductions; and lastly the
in 1994, which forgave $60 billion of debt and representing about $190 billion in bank claims.
Bankers Trust New York
were all downgraded by
due to loans these banks
Barings Bank Failure
Barings Bank, one of the oldest banks in London, was full of growth potential and was even used by the Royal Family. The bank seemed stable and its involvements in emerging markets were positive until trades in Singapore brought it down in 1995.
The bank collapsed after the head of derivatives, Nick Leeson, made unauthorized trades primarily in futures and options linked to the Nikkei 225 and Japanese government bonds. Leeson kept his losses hidden in an account that was covered by the bank, but an earthquake in Kobe, Japan in 1995 sent the market plummeting downward. He lost $1.3 billion and the bank could not cover the losses. The bank was taken over by Dutch-owned
for one pound.
Russian Ruble Crisis
In 1998 Russia was forced to default on its sovereign debt and devalue the ruble. The Russian financial crisis also known as the "Ruble crisis" hit, dragging major American banks into its problems.
The devaluation of the ruble prompted President Yeltsin to remove the government in place including Prime Minister Sergei Kiriyenko, which precipitated a further decline in confidence in the Russian financial system. In 2008, Russian markets fell by more than $1 trillion.
Long-Term Capital Management
(LTCM) did business with nearly every Wall Street bank at that time. When the ruble defaulted, LTCM found itself flooded with losses. The idea that LTCM could fail and take down other Wall Street firms sent panic throughout the U.S. financial industry.
American International Group
offered then to buy out the fund's partners for $250 million, to inject $3.75 billion and to operate LTCM within Goldman's own trading division, however the deal was rejected. The
Federal Reserve Bank
of New York organized a $3.6 billion bailout with several of the major creditors to avoid a wider collapse.
Salomon Smith Barney
all participated in the bailout. Several of the banks such as Citibank and
Bank of New York
Argentinian Banking Crisis
Several banks took massive writedowns in 2002 when the Argentinean interim government led by Rodríguez Saá defaulted on debt payments that totaled around $132 billion. The peso lost 70 percent of its value and banks wound up losing
HSBC was one of the banks hardest hit. HSBC Bank Argentina had assets of $5.7 billion. The bank had to come up with provisions
Other banks facing large losses included Citibank, which held a large investment in Clearstream, an Argentine fund and lost a little over
"At the end of the quarter, we will have written off or reserved approximately two-thirds of our total corporate and consumer loans within Argentina,'' said Sanford Weill, Citigroup's CEO in a conference call with Wall Street analysts in April 2002, according to The new York Times. ''Something of that magnitude has never occurred in any of the emerging market countries that we have operated in.''
Other banks that took large write downs included
The Asian Financial Crisis
In 1997 banks investing in Asia got slammed when Thailand's government decided to float the value of the baht. The decision spurned the Asian financial crisis that raised fears of a worldwide economic meltdown. The country already had a large amount of foreign debt and the country was left in a position where it could not pay it back. The incident cause panic throughout Asian countries.
The International Monetary Fund (IMF), the World Bank and Washington,
organized bailout packages to allow Asia to get back on its feet.
However, some large U.S. banks faced large losses due to the turmoil in Asia including Citicorp, Bank of America and JP Morgan. JP Morgan alone ,
reported charge offs of $24 million
due to over a billion in credit losses in Asia.
The Mexican Peso Crisis
The 1994 Economic Crisis in Mexico is widely known as the Mexican peso crisis because it was caused by the sudden devaluation of the Mexican peso.
The currency crisis stabilized somewhat after the U.S. helped arrange a $50 billion bailout in loans and guarantees that attracted a lot of criticisim. The criticism stemmed central role of the former co-Chairman of Goldman Sachs, U.S. Treasury Secretary Robert Rubin, who used a U.S. Treasury Department account to distribute $20 billion to bail out Mexican bonds, of which Goldman was a key holder.
Citigroup was also a large holder of the bonds.
--Written by Maria Woehr in New York.
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