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. Last Updated: 07/27/2016

Kazakhs Rebuff Hedge Funds

ALMATY, Kazakhstan -- Kazakhstan's central bank said Friday that it was capable of stabilizing the country's banking system after what it called a "speculative attack" by large hedge funds.

"The National Bank of the Republic of Kazakhstan has ... the necessary means and resources at its disposal and is also ready to undertake all necessary measures to maintain financial stability," it said in a statement.

The central bank broke its silence after a torrid week for Kazakhstan's banks, whose heavy borrowing abroad has made them vulnerable to the global credit crunch triggered by the U.S. subprime mortgage crisis.

The cost of credit default swaps offering insurance against possible default by Kazakh banks has blown out this week.

Banks' bonds and stocks have slumped after ratings agencies Standard & Poor's and Moody's this week put under review several Kazakh ratings, including those of the sovereign and leading bank Kazkommerts, for a possible downgrade.

"The heightened concerns of international investors and creditors may represent, in our view, the result of a speculative attack by large hedge funds on the market for credit derivatives of Kazakhstan's banks," the statement said.

Luis Costa, emerging debt strategist at ING Bank in London, welcomed the verbal intervention. He said yield premiums on Kazakh bank bonds had narrowed by 50 basis points and by 300 pips for consumer lender Alliance Bank.

"It's good that the central bank is coming to the headlines and bringing more optimism to the Kazakh [corporate] curve," he said. "There are much better buy flows on the cash curve, and I expect this to continue."

Speculative demand for Kazakhstan's tenge currency by foreign investors betting on a devaluation has also forced up money market rates, with one-month interbank rates spiking to over 20 percent.

Troika Dialog said the pressure might force Kazakhstan's central bank to abandon a strong tenge policy that has made it possible for banks to borrow abroad freely and cheaply in recent years.

"This policy is only tenable in a favorable global environment where liquidity is on the rise," Troika economists Anton Strutchenevsky and Olga Veselova wrote in a note. "If foreign capital inflow drops off, tenge volatility may increase. Given the negative current account, a moderate devaluation should not be ruled out."