Eastern Europe Growth Probably Slowed Last Quarter on Credit-Crunch Threat

Eastern European countries will probably report slowing economic growth today as concern that bank funding to the region will dry up dents confidence and the euro-region debt crisis curbs exports.

Fourth-quarter growth in the Czech Republic and Slovakia was the weakest since the 2009 recession compared with the year- earlier period, while Hungary expanded at the slowest pace since January-March 2010, three Bloomberg surveys show. Bulgaria will report the weakest growth in six quarters, while Romania’s economy also lost steam, according to separate surveys. Poland reports data for the quarter March 1.

The euro region’s debt crisis has infected eastern Europe, which gets financing from banks such as UniCredit SpA and relies on western Europe to buy products including cars from Volkswagen AG’s Czech-based unit, Skoda Auto. While the European Central Bank’s 489 billion euros ($641 billion) of three-year loans have eased concerns of a credit squeeze, dangers remain.

“We’re seeing tentative signs of a pickup in Germany but it’s still early days,” William Jackson, an emerging-markets economist at Capital Economics Ltd. in London, said Feb. 13 by phone. “I wouldn’t be surprised to see a fresh spike in investor risk aversion, potentially causing more difficulties for the economies in emerging Europe.”

Bonds, Currencies Rebound

Eastern European bonds and currencies have recovered in recent weeks on expectations the decline in euro-region growth will be less severe and after the U.S. Federal Reserve extended its pledge to keep interest rates near zero through at least late-2014, Magdalena Polan, senior European economist at Goldman Sachs Group Inc., wrote in a Feb. 10 research note.

The ECB’s longer-term refinancing operation in December improved funding conditions for western European lenders, which control about three-quarters of their eastern neighbors’ banking industry, alleviating investor concern that tighter capital rules will sap cross-border credit flows, Polan wrote.

Hungary’s forint is the best-performing currency this year, rising 9.8 percent against the dollar and the Polish zloty is the fifth-best performer with an 8.4 percent appreciation, according to data compiled by Bloomberg.

The forint was the second worst-performer in the second half of last year after the Belarusian ruble, declining 24 percent, while the zloty declined 19.5 percent, the fifth most. European banks must have core capital reserves of 9 percent after writing down their holdings of sovereign debt by the end of June, European Union leaders decided in October. That may require an additional 115 billion euros ($149 billion) of capital, according to the European Banking Association.

‘Positive Signs’

“The ECB’s LTRO auctions reduced the refinancing risk for euro-zone sovereigns and banks and that takes away a lot of potential credit crunch,” Raffaella Tenconi, an emerging-market economist at Bank of America Merrill Lynch in London, said in a Feb. 13 phone interview. “There are positive signs but whether they’ll remain there for long enough remains to be seen.”

Central and eastern Europe’s economic outlook improved in January on optimism about the euro area, the ZEW Center for European Economic Research and Erste Group Bank AG (EBS) said Jan. 19. The economic-sentiment indicator, a measure of investor confidence in the region, rose 14.8 points to minus 26.6 points, the ZEW said.

An index of investor and analyst expectations for Germany rose to 5.4 this month from minus 21.6 in January, the ZEW said yesterday. Fed Chairman Ben S. Bernanke on Feb. 2 highlighted “signs of improvement” in the world’s biggest economy. A Chinese manufacturing index beat economist estimates in January with a reading of 50.5, a Feb. 1 government report showed, adding to speculation the world economy is recovering.

Slower Growth

Poland’s 2011 gross domestic product rose 4.3 percent from a year earlier, compared with a revised 3.9 percent in 2010, the government said Jan. 27. That implies fourth-quarter growth of 3.8 percent, the slowest pace in six quarters, according to Jackson of Capital Economics.

The Czech economy expanded 0.7 percent from a year earlier in that quarter, slowing from 1.2 percent in the previous three months, while Hungarian output grew 0.9 percent, down from 1.4 percent, two surveys predicted.

Slovak GDP rose 2.1 percent in the October-December period, down from 3 percent in the previous quarter, while Bulgaria’s economic growth decelerated to 1.3 percent from 1.6 percent and Romania’s slowed to 2.6 percent from 4.4 percent, according to three separate surveys.

Because of its dependence on the euro region, eastern Europe’s growth lags behind Asia and Latin America, the two developing regions it competes with for export markets and investments, Tatha Ghose, senior emerging-market economist at Commerzbank AG in London, said Feb. 13 by phone.

“The U.S. and China are the driving force behind the global cycle but for emerging markets in Europe the EU growth outlook has a big impact,” he said. “The trend growth rate of the region is much lower than Asia, Latin America or even the Commonwealth of Independent States.”

To contact the reporter on this story: Agnes Lovasz in London at alovasz@bloomberg.net

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net

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