New York: Citigroup Inc., Goldman Sachs Group Inc. and other US banks had hoped emerging markets would take some of the sting out of the credit crisis, but instead they seem to be worsening the pain.

Emerging markets have been battered along with other financial markets, leaving the main index of emerging markets stocks down about 59% so far this year while sovereign debt has weakened to 2002 levels.

Wrong call? Citigroup chief executive Vikram Pandit had earlier said that the company was heavily overweight in emerging markets. Chris Kleponis / Bloomberg

“The data shows that exposures...are big enough to bring further pain to these big US banks and brokers," analysts at Fox-Pitt Kelton Cochran Caronia Waller Llc., an investment bank focused on the financial services industry, wrote in a research note last week.

Citigroup, which gets one third of its revenue from emerging regions, has been setting aside hundreds of millions of dollars to cover spiking credit losses in Brazil and Mexico.

Its revenue from Latin America dropped 23% in the third quarter.

Goldman Sachs bought a stake in Industrial and Commercial Bank of China Ltd (ICBC) in 2006 that was valued at $7.1 billion (about Rs31,240 crore) at the end of August. ICBC’s shares in local currency terms have fallen by about 40% since then.

For about a year, it looked as if the financial crisis would mainly slam the US and parts of Europe, while emerging markets enjoyed a steady flow of dollars from record-high commodities prices led by oil, gold and copper.

But even with windfalls from commodities, the strength in markets such as Brazil, Russia, India and China seemed unusual given that when developed markets weaken, emerging markets generally become weaker still.

Many investors and banks, however, thought emerging markets had come far enough along to be able to “decouple" from the US, so banks rushed to increase business in emerging markets and bragged about their growing exposure.

“We’re long the world, and heavily overweight in emerging markets as a company," Citigroup chief executive Vikram Pandit had said at an investor presentation in May.

In June, Merrill Lynch and Co. CEO John Thain had said: “Our ability to grow our business over the next few years is going to be particularly focused on the emerging markets in the growing parts of the world," noting that Brazil, Russia, India and China offered real opportunities.

That thinking now looks to have been misguided as the world labours under a financial crisis, the breadth of which has not been seen since the Great Depression of the 1930s.

Since August, currencies such as the Brazilian real and Mexican peso have plummeted against the US dollar, while stock markets in Russia and China were pummelled to multi-year lows.

“The thought that emerging markets are decoupled from the rest of the world is just not the case," said Sean Bogda, a portfolio manager at Global Currents Investment Management.

“We’ve only just started to see some hedge funds blow up in emerging markets. We’re going to see more of those in the near future, which means the deleveraging may continue," said David Spegel, global head of emerging markets strategy at ING Groep NV. “We’ve only just seen two months and, historically, crises in emerging markets last a lot longer."

Emerging markets companies that issued debt will likely have trouble refinancing when their bonds mature, which is apt to be exacerbated by the strengthening US dollar.

These companies face debt maturities of $450 billion in notes, bonds and loans next year, and another $487 billion in 2010, according to deal tracking firm Dealogic. Market conditions have made credit scarce and refinancing difficult.

Any corporate defaults will hurt banks that loaned money to companies in emerging markets.

“Rising loan loss reserve requirements due to economic slowdown in the emerging markets region would be most obvious with the large money centre banks in the US," said Keith Wirtz, president of Fifth Third Asset Management Inc.

It all adds up to a gloomy outlook, Wirtz said.

“They’re going to see their business fall down. Capital markets activities, particularly those related to investment banking, mergers and acquisitions, everyone should expect that there is going to be a slowdown," Wirtz said.

Dan Wilchins contributed to this story.