* Stocks lose over 6 percent, hit three year lows
* Increasing panic over worries of global recession
* S&P raises concerns over Russia, Hungary and Ukraine
* South Africa rand rebounds from record fall previous day
By Peter Apps
LONDON, Oct 16 (Reuters) - Emerging stock markets slumped more than six percent on Thursday, hitting their lowest in three years as panic returned to financial markets and ratings agency S&P raised concerns over Russia, Hungary and Ukraine.
The fall — following on from another sharp drop on Wednesday — destroyed gains made earlier in the week, when optimism briefly returned to markets on the back of plans by Western governments to take stakes in troubled banks.
With Iceland’s colossally indebted banking sector collapsing last week, taking with it its economy and currency — still effectively untraded in international markets since its nosedive last week — investors are increasingly alarmed by problems in central and eastern Europe.
“Up until now, the focus has really been on the banking sector but now people are beginning to shift to realising that if the banks are in trouble then that means the rest of the global economy will be as well,” said emerging markets strategist Nigel Rendell at Royal Bank of Canada. “People are increasingly looking at a global recession. And of course to a certain extent it is a self-fulfilling prophecy.”
Benchmark emerging equities .MSCIEF lost 6.80 percent by 1000 GMT, falling at one stage to their lowest since July 2005 although European time zone markets fell slightly less than their Asian counterparts. Emerging equities have now lost 53 percent of their value so far this year.
Indian shares fell 7 percent, hitting their lowest since July 2006 and now down 50 percent since the start of the year [nBOM349616].
“There is panic in the market and sellers are selling at any price point as if there is no tomorrow,” said KRIS strategist Arun Kejiiwal. “It’s very difficult to predict when and the market will bottom out in this scenario.”
Emerging sovereign debt spreads 11EMJ were five basis points wider at 585 over US Treasuries, another sign of increased risk aversion.
Ratings agency Standard & Poor’s said on Wednesday it might downgrade both Hungary and Ukraine on worries over the financial sector in both countries [ID:nN15340603].
S&P also warned separately that Russia’s haemorrhaging foreign-exchange reserves could be a forward indicator of a further ratings cut, having lowered its outlook for the country last month to stable from positive [nLG692190].
Central bank data showed Russia’s gold and foreign exchange reserves falling 5.7 percent in the past two weeks to a near six-month low of $531 billion. Most was believed to have been used to support the rouble.
Hungary’s currency fell sharply on Wednesday after two banks said they would stop or cut back foreign currency loans, but rose 2.16 percent on Thursday after the central bank signed a 5 billion euro deal with the European Central Bank.
As problems worsen, the IMF looks set to become a powerful force in central and eastern European economies, beginning talks with Ukraine's Finance Minister on Thursday as the country faces rising investor concern over its banks, economy and political stability. Ukraine's hrvynia UAH= was down 2.97 percent.
Analysts also believe Iceland will ultimately be forced into a multi-billion-dollar deal with the IMF despite its current flirtation with Russia, from which it wants a several billion euro loan to help it rebuild its shattered economy.
South Africa's rand ZAR= was up 5.37 percent, rebounding sharply from its biggest ever one-day fall previous day. But analysts warn a wide current account deficit, ongoing inflation and political worries leave the economy dangerously exposed.