beyondbrics

Another day, another bout of euro worries hitting central and eastern Europe. The region’s bourses are sharply down on Thursday – with the MSCI east Europe index falling 6.95 per cent, compared with a 4.98 per cent drop in western Europe.

It’s a useful reminder of CEE’s continuing vulnerability and dependence on external capital and credit inflows. In the 2008-9 crisis, the European Union and the International Monetary Fund stepped in to fill the breach left by private financiers. In a timely report, Unicredit suggests they might have to help out again.

While most CEE economies have fairly low levels of public debt – quite unlike the eurozone’s problem countries – they are suffering from investors’ general caution over Europe and from the knock-on effects of slowing economic growth in western Europe, notably Germany, as was revealed in GDP figures this week for Germany, the Czech Republic, Slovakia, Hungary, and Romania.

Since the end of July, the MSCI east Europe index is down over 17 per cent, compared with a 12 per cent drop in the MSCI global emerging markets index. In local currency terms, Warsaw (see chart above) has seen the biggest drop of CEE’s larger boursse with a decline of nearly 17 per cent.  These are big losses, with evidence of plenty of indiscriminate selling in the general flight to safety.

Unicredit looked at five countries which turned to EU/IMF rescue programmes in 2008-9 – Hungary, Ukraine, Latvia, Serbia and Romania.  It says bluntly that while all these countries have done well with their economic restructuring, the international outlook makes the future decidely tricky:

Recent weeks have seen a considerable increase in uncertainty surrounding the outlook for global economic activity and capital flows. Most of the above countries have managed to register impressive improvements in their external and fiscal accounts from a flow perspective but it is uncertain in this current environment if this is sufficient to guarantee market access at viable financing costs consistently over the coming quarters.

Unicredit points out that while the five countries have benefits from disbursements totalling a chunky €46.9bn since 2008, they will soon have to start repaying these loans.

Hungary kick starts this process with an EUR 2.0bn repayment to the EU in 4Q this year, with IMF repayments next year totalling EUR 3.6bn
next year. By 3Q next year, all 5 countries will have begun repayment, representing an outflow from the region of EUR 8.2bn next year, followed by EUR 14.2bn in 2012. Ukraine is scheduled to repay a total of EUR 2.5bn over the course of next year, Romania EUR 1.5bn. Serbia, having only drawn partial payments from its program, must repay a manageable EUR 0.2bn next year, Latvia EUR 0.3bn.

This chart paints the picture with the flows turning negative over the next few quarters:

Serbia and Hungary have now finished their programmes. Romania had the good sense this April to set up a precautionary €5bn EU/IMF stand-by arrangement. Latvia’s programme is scheduled to expire at the end of this year – so it could do the same.

Ukraine is in a much harder position with a programme that is still in place but suspended for lack of progress on economic reform. IMF-friendly reforms would bring Kiev a net €1.7bn next year.

Latvia, which has elections next month, could go back to the EU/IMF for more support. Serbia would fine this more difficult, says Unicredit, as it has decentralised some funds from the central government to local authorities in a way the IMF criticised. But Belgrade’s repayments are modest.

The biggest questions hang over Hungary.  Viktor Orban, prime minister, has pubicly broken with the IMF, declaring last year that Budapest didn’t need any more support. But as Unicredit says, that leaves him at the market’s tender mercies since repayment to the EU/IMF will have to be financed from the markets and will last until 2015.

Not for the first time,  there could be tensions between Orban and his international partners.

Unfortunately for CEE leaders – or perhaps fortunately – the critical developments will come in western Europe, particularly in the eurozone. If the eurozone meets its challenges and devises credible refinancing and recovery plans for its weaker members, including Greece, Portugal, Spain and Italy, then CEE economies will benefit.

For now, investors are decidely negative. But in a report on Thursday Willem Buiter, Citigroup’s chief economist, takes a different view. He says:

This note argues that both the sovereign crises and the banking crises can and will be managed and that market concerns are overblown. We take the contrarian view that while the path to the end-state could be choppy, the current crises will in the end result in a stronger EU and Euro area.

It’s not the first time the outspoken Buiter has challenged the majority opinion.  There will be many European policymakers hoping that on this occasion he’s right.

Related reading
Slower growth adds to eurozone woes, FT
Panic measures will ruin the Bric recovery, FT