Central and eastern Europe needs a “firewall” from possible defaults in the euro region, where leaders struggle to fix a sovereign debt crisis, said the head of Russian brokerage Renaissance Capital.
Greece will probably be the first to default among the nations using the euro and may be followed by others with high-debt restructuring needs if the European Union fails to prevent it from spreading, Renaissance Chief Executive Officer Stephen Jennings said in an interview in Bucharest yesterday.
“The Europeans are just trying to pretend that gravity doesn’t exist,” Jennings said, calling defaults of some euro-region countries “inevitable. I don’t think you can rely on Europe making the right decisions, so as a country you have to firewall yourself from that process.”
European leaders need to persuade investors they will hammer out a solution to the Greek debt crisis, which has already spread to Ireland and Portugal and is threatening to infect Italy. Greece is waiting for a second international bailout, while record bond yields threaten to boost financing cost for Spanish and Greek debt, rekindling concern it will spread eastward through banking and trade links.
Southeast Europe, including Romania, Bulgaria and Serbia, is most at risk, because of its proximity to Greece, and an escalation of the crisis would hurt more western European banks, Erik Berglof, chief economist at the European Bank for Reconstruction and Development, said on July 14.
Almost a third of Bulgaria’s banks and 17 percent of Romania’s are owned by Greek parents including Piraeus Bank SA, Alpha Bank SA and EFG Eurobank Ergasias SA. Greek lenders own 15 percent to 25 percent of the banks in the non-EU states of Macedonia, Serbia and Albania.
Romania, the largest Balkan country, is in a “strong fiscal position,” after making “tough” decisions to meet International Monetary Fund and EU demands, said Jennings, whose company is half-owned by Russian billionaire Mikhail Prokhorov. It has operations in Russia, Eastern Europe and the Commonwealth of Independent States.
Still, it needs to adopt further reform measures to ensure it is strong enough to survive, he said.
“If the fire spreads far enough and fast enough, what the markets will do, they will attack, and it will be devil take the hindmost,” he said “So it’s absolutely critical that Romania puts itself in a position where in a worst European case scenario it is a winner, not a loser.”
Wage Cuts, Taxes
The country, which received two international bailouts since 2009, cut public wages and increased a value-added tax to trim its budget deficit to less than 3 percent of GDP in 2012 from 6.5 percent in 2010.
Romania’s credit rating was raised to investment grade for the first time in almost three years this month by Fitch Ratings. The economy expanded 1.7 percent in the first quarter from a year earlier, ending a two-year contraction as demand for exports increased.
It “definitely” ranks “significantly better than average” in the region, below Poland and higher than similarly rated Hungary, which is “very exposed to a potential real fire in Europe,” Jennings said.
Moody’s Investors Service also gives Romania a comparable Baa3, while Standard & Poor’s rates the country’s debt at BB+, its highest speculative grade.
The cost of insuring Romania’s bonds against non-payment stood at 279 basis points yesterday, below higher rated Italy’s 331 basis points, Spain’s 385 and Hungary’s 325 basis points, according to data from CMA. CDS prices rise as investor perceptions of the borrower’s creditworthiness deteriorate.
“Several countries in the euro zone need to restructure their debt,” Jennings said. “There are several countries that almost certainly will need to leave the area, there will be the need to support and recapitalize banks that were exposed to those write-downs.”