Eastern Europe’s economic recovery may be scuttled by any Greek debt restructuring, which would curb lending by western banks and undermine investor bets that have propelled the region’s stocks, bonds and currencies.
While the region has three of this year’s 10 best- performing currencies and five of the 10 equity indexes that rose the most, 76 percent of its banking market is controlled by western European lenders still threatened by the euro’s debt crisis.
“You would expect that the Greek troubles now would have a bigger impact on emerging Europe,” said Neil Shearing, senior emerging-market analyst at Capital Economics in London. “It’s a puzzle. I suspect it might just be the calm before the storm.”
The risk is that a new round of Europe’s sovereign debt turmoil will prompt lenders including UniCredit SpA (UCG), Erste Group Bank AG (EBS) and Societe Generale (GLE) SA to rein back lending just as the region recovers from a credit crunch that contributed to recessions three years ago. The European Union forecast on May 13 that every eastern economy will grow this year for the first time since 2008.
Euro-area finance ministers meet today in Brussels to prepare a new plan to ease Greece’s debt burden and prevent the euro area’s first sovereign debt restructuring. Eighty-five percent of international investors surveyed last week said Greece will probably default, with smaller majorities predicting Portugal and Ireland will do the same, according to a Bloomberg Global Poll released last week.
A Greek default would “cause tremors” in eastern Europe, affecting currencies, Czech Prime Minister Petr Necas said at a press conference in Katowice, Poland today.
The cost of insuring Hungary’s debt against default, which climbed to 410 basis points last June, is now at 247. Romania’s credit default swaps trade at 227 basis points, down from 415 last year. Greece’s CDS jumped to a record 1,251 basis points last week from 488 a year ago.
In the event of a “disorderly” default by Greece or Ireland, east European CDS spreads and bond yields would rise and currencies and stocks would tumble, according to Christian Keller, an emerging-markets economist at Barclays Capital in London who said he doesn’t expect this to occur.
‘More Radical Evolution’
“If someone was to think that there’s a risk of some more radical evolution of things in Europe, then things are not priced correctly,” Keller said. “The European banking system would be liquidity starved and would go through a shock. At that moment all emerging European countries, which constantly need financing, would have an issue.”
Eastern Europe would find it hard to avoid contagion from the west transmitted through banks and trade links, the International Monetary Fund said May 12 in its regional outlook. Authorities in the east should “make every effort to reduce vulnerabilities,” the Washington-based fund said.
“In an adverse scenario in which western banks take a significant hit, they might have to resort to sizable cuts of their exposures to emerging Europe,” the IMF said.
At the same time, the IMF increased its economic growth forecast for emerging Europe, citing increased domestic demand and stronger public finances. The region’s economies will expand a cumulative 4.3 percent this year and next, instead of the 3.7 percent and 4 percent the IMF projected April 11, the fund said.
European Central Bank Governing Council member Ewald Nowotny doesn’t expect a contagion on eastern Europe from Greece, he told reporters in Vienna today. He said “these countries have learnt and are experiencing an economic revival.”
Erste Bank, the second-biggest lender in eastern Europe, said April 28 that growth in the Czech Republic, Slovakia and Austria will offset “economic issues” in Romania and Hungary, helping the bank increase profitability this year.
Eastern “economies no longer stand out as the ‘rotten apples,’’ said Lars Christensen, chief emerging-markets analyst at Danske Bank A/S in Copenhagen. ‘‘They didn’t loosen fiscal policy during the crisis and they are in a much better state.’’
Hungary’s debt, the highest among the EU’s eastern members, will be 75.2 percent of gross domestic product this year, compared with 55.4 percent in Poland and 41.3 percent in the Czech Republic, according to the EU forecast. Euro-region debt will average 87.7 percent, with Greece at 157.7 percent.
‘Significant Risk Factor’
Still, Hungary’s central bank identified the euro crisis as ‘‘a significant risk factor,” according to its financial stability report.
“The institutionalized crisis management scheme of the EU has so far been able to offset the deepening euro area crisis only to a small extent,” the bank said last month. “All this may have a considerable negative impact.”
While the largest western banks in the region made pledges to remain in eastern Europe at the height of the credit crunch, they have reduced lending by 15 percent over the last two years, IMF data show.
The practice of borrowing in euros and Swiss francs pushed some eastern countries to the verge of insolvency in 2008 as credit dried up and plunging local currencies ballooned repayment costs. Foreign-currency loans account for about two- thirds of outstanding credit in Hungary, Romania and Bulgaria, with higher rates in the Baltic states.
Those loans will keep weighing on bank balance sheets and economic growth, said Franziska Ohnsorge, senior economist at the European Bank for Reconstruction and Development.
In Lithuania, loans more than 90 days past due equaled 19.1 percent of lending at the end of the first quarter, compared with 18.7 percent in Latvia, according to central bank data. Hungary’s ratio was 12.5 percent at the end of last year, and the central bank forecasts it will reach 15 percent by year-end.
“What puts a constant strain on the banking system is the recovery lagging,” Ohnsorge said. “That puts pressure on capital and capitalization rates and delays more buoyant credit growth. This pressure on the capital base continues until the pre-crisis credit booms have unwound themselves.”
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