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Emerging Markets and Their Currencies Get Smashed Hampering Borrowing Costs

“Emerging-market stocks tumbled the most in 20 months, currencies weakened and government borrowing costs rose after China’s cash crunch worsened and the Federal Reserve said it may reduce monetary stimulus this year.

The MSCI Emerging Markets Index slid 3.2 percent to 916.20 as of 12:11 p.m. in London, the most since Oct. 3, 2011. Turkey’s benchmark stock index lost 4.4 percent, the most among major emerging markets, as the lira and India’s rupee hit record lows. BYD Co. (1211) slumped 9.3 percent in Hong Kong, while KGHM Polska Miedz SA fell 8.5 percent in Warsaw. Yields on South Africa’s benchmark 10.5 percent bonds due December 2026 jumped 0.42 percentage point to 8.33 percent.

Fed Chairman Ben S. Bernanke said yesterday the central bank may start reducing bond purchases and end the program in 2014 should risks to the U.S. economy abate. China’s benchmark money-market rate climbed to a record and a private report showed manufacturing shrank at a faster pace this month. Funds investing in developing-nation assets saw outflows of more than $19 billion in the three weeks to June 12, the most since 2011, according to EPFR Global.

“After 10 years of solid inflows into emerging-market debt, we should prepare ourselves for a period of outflows,” Maarten-Jan Bakkum, an emerging-market strategist at ING Investment Management in The Hague, said by e-mail. “This should push currencies down more, lead to higher interest rates in emerging markets and make it necessary for investors to adjust their EM growth expectations downwards.”

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