beyondbrics

Central and east European markets have so far lived through the Greek hurricane remarkably well. Even Romania, which has been through the wars, economically speaking, and has a big Greek business presence, has seen little impact: a key $1.5bn eurobond launched last week on very fine terms has barely moved from its issue price.

But can this last? Even though most investors have taken account of the risk of a Greek default, it is hard to fully discount the potential consequences. The lesson of the Lehman Brothers debacle is that the knock-on effects are hard to predict.

For this week, with the political gales raging in Athens, the MSCI index of CEE shares was down 3 per cent mid-day on Friday, compared with an increase in Eurotop of 0.5 per cent up and a drop of 2.1 per cent in MSCI’s emerging markets index.  Hardly a disaster.

Indeed, for the year to date, CEE equities are among the top performers in difficult global markets. The MSCI regional index is up 3.3 per cent compared with a drop of 2.3 per cent drop in the Eurotop index of leading west European stocks and 4.2 per cent global decline in MSCI’s emerging markets index.

Even in Romania and Bulgaria, two countries with particularly strong economic ties with Greece, there is no clear sign of contagion.  The Bucharest stock market is down 0.3 per cent on the month but up 5.5 per cent on the year.  Sofia is up 13.6 per cent on 2011 – making it one of the world’s top performers -  despite a 3.3 per cent drop in June.

In bonds, it is a similar story. The JP Morgan EMBI+ index of emerging market hard currency bonds for up 3.2 per cent for CEE for the year to date, a bit short of the 3.9 per cent global gain but not hugely so. For June, CEE is up 0.255 per cent versus 0.265 per cent. As mentioned, Romania”s five-year new issue is holding up well, as have Hungary’s sovereign bonds launched this year.

Fitch said in a report this month:

The [Hungarian] government completed its 2011 external financing plans with the issuance of a USD3bn ten-year bond and a USD1.25bn 30-year bond issued in March 2011 (the 30-year bond was re-opened in April 2011) and a seven-year EUR1bn Eurobond in May 2011, at relatively tight spreads, despite market concerns over highly-indebted sovereigns on the periphery of the euro area.

So, nothing much to worry about, then? Gunter Deuber, head of CEE macro-economic research at Austria’s Raiffeisen Bank, thinks not.

He points to the considerable reputation the region has gained in overcoming the 2008-9 global crisis through serious economic restructuring, not least in Romania where public sector pay, for some employees, was cut by 20 per cent. “They have done what was needed. This is something other countries in the EU must still deliver,”  said Deuber, with a thinly-veiled dig at Greece.

Also, the authorities have prepared for a possible default, making sure that the subsidiaries of Greek banks are in good shape to operate without funds from their parent groups, if need be, says Deuber. This is less of a challenge than might be imagined since many international banks operating in the region have local deposits in access of local loans and other assets.

But this isn’t the whole story. The Lehman crisis showed that once one default prompts a sudden rush for the financial exists, it becomes impossible to predict where the stampede will end – or who will be knocked down in the panic.

Gabriel Sterne, economist at Exotix, the UK stockbroker,  is worried that this is precisely the danger that now stalks south-east Europe. “It’s the second-round effects. People think they are anticipating the worst for Greece. People thought they were priced in with Lehman, but they turned out to be wrong. ”

Sterne argues that the very strength of CEE markets this year is a danger signal – evidence that investors have underestimated the risks.

CEE bulls retort that, as Deuber has suggested, the region’s policymakers have had plenty of time to prepare for a possible Greek collapse – and in much more cautious global circumstances than existed before Lehman.

So the insurance policies are in place. But we won’t know whether the cover is sufficient unless and until the worst happens.

Related reading:
CEE: steady as she goes, beyondbrics
Bucharest seeks to renew market confidence, beyondbrics