In early 2009, central and eastern Europe (CEE) was the region “most blighted by the financial crisis”, as Lex reminded us last week. There were real concerns for foreign banks with big CEE exposure – above all from Austria, Italy and Scandinavia.
And you might recall, the IMF was preparing to bail out some of the region’s most stricken countries and rating agencies were moving to downgrade big lenders to the region, amid a general feeling of crisis.
Less than a year later, a report in Monday’s FT shows yet again how yesterday’s crisis can indeed become today’s boom — and the cycle can all too easily begin again (our emphasis):
Central and eastern European markets have been the strongest performers in the world in the past six months, in a sharp turnround of fortunes as the concerns of investors have switched to the mounting debts in the developed world.
These markets have been buoyed by the determination of governments in the region to straighten out their public finances, even as some draw on the support of the IMF.
In contrast to eurozone members, such as Greece, which saw a collapse in its bond markets last week, investors have been impressed by the performance of the region’s stronger economies, such as Poland, as well as those that have been assisted by the IMF, such as Hungary and Latvia.
Indeed, as Shahin Vallee, emerging market strategist at BNP Paribas, told the FT: “This is a story of public finances. If you compare Hungary and Greece, then Hungary, the emerging market country, is a safer bet.”
Consider: since the end of June, the region’s stocks have risen 39 per cent, against 24 per cent for emerging markets as a whole and 17 per cent for the developed world, according to FTSE indices.
The cost to protect government debt against default has also fallen sharply in countries such as Poland and Hungary, compared with steep rises in developed world nations, such as Greece and Portugal, over the same period.
In currency markets, the Polish zloty, one of the most liquid in eastern Europe, has jumped 10 per cent against the euro in the past six months.
Not only that, as the FT reported in mid-January, big lenders to the region are now betting that recovery will take hold this year.
Putting its money where its proverbial mouth is, UniCredit of Italy plans to open 100 branches across central and eastern Europe; Austria’s Raiffeisen International is launching an internet-based banking service; and Erste, also of Austria, is opening 70 branches in Romania, home to its largest CEE business.
Not surprisingly, this follows signs of a pick-up in credit growth in some countries, such as Poland, in late 2009,
But — and there’s always a `but’ in these turnround situations — analysts warn that eastern Europe could be derailed by debt problems in the industrialised world and the stalling of the global recovery.
Last week, most stock markets fell, dragged lower by the fall in the Greek bond markets and fears of contagion elsewhere.
As one emerging markets strategist told the FT:
“Hungary and Latvia have impressed investors with their reforms, but they have a long way to go to get their books in order… Like all emerging markets, they could easily suffer a big sell-off over the coming weeks if the sovereign risk of the developed world increases…The emerging markets are not decoupled from the developed world.”
In a December post highlighting the downside to the CEE rebound, FT Alphaville warned of the region’s growing addiction to borrowing in foreign currency for everything from second homes to TV sets.
So much, according to Reuters, that the European Bank for Reconstruction and Development expressed concern that, even though FX loans nearly blew out the region earlier in the year, most countries and institutions had failed to learn anything from the episode.
Sound familiar?
Related links:
A week when politics ruled the markets - PrudentInvestor
Greek debt crisis - FT.com
Review of central and eastern Europe – FT
Poland not so strong afterall? – FTAlphaville
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