Greece Losing Ability to Shock Amid Eastern European Bond Calm

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Bond fund manager Lutz Roehmeyer was vacationing in Greece last week as the nation headed for its showdown with the European Union. He’s made no change to his “neutral” holdings of eastern European debt.

“Greece is now isolated after so many years of talk about the Grexit,” said Roehmeyer, who oversees about $1.1 billion for Landesbank Berlin Investment, including the Weltzins-Invest fund which beat 92 percent of peers for the past five years.

Whereas previous flashpoints in the Greek crisis have sent shockwaves across eastern European markets, even the most vulnerable countries are now better insulated. The central bank in Bulgaria, where Greek lenders own 28 percent of the banking industry, has boosted foreign-currency reserves by around 69 percent in the past four years. The European Central Bank is set to extend a backstop facility to Bulgaria and other nations in the region to ward off contagion from Greece, people familiar with the situation said last week.

Bulgaria’s bonds in euros due 2022 fell 0.3 cent on the dollar to 95.96 cents on Monday. They declined the most since their sale in March on June 29, after Greece announced plans to hold a referendum on Europe’s austerity demands. Romania’s euro notes due 2024 slipped 0.4 cent yesterday. The bonds were little changed today.

Romania failed to sell local debt on Monday, rejecting all bids at an auction of 2021 notes after demand fell short of the Finance Ministry’s target.

ECB Bazooka

The risk for most central and eastern European countries lies in their ties with the wider euro area and the extent to which the Greek crisis triggers stress across the region, William Jackson, a senior economist at Capital Economics Ltd. in London, wrote in a research note. Monday’s market moves suggest contagion may be limited, he said.

Greece’s four largest lenders all have units in Bulgaria and Romania. Piraeus Bank SA, Eurobank Ergasias SA, the National Bank of Greece SA and Alpha Bank AE hold 28 percent of total bank assets in Bulgaria. Greek lenders own about 12 percent of Romanian bank assets, central bank data show.

Bulgaria’s central bank accumulated $17.2 billion in currency reserves by the end of May, compared with $10.2 billion four years earlier.

The ECB “could step in with some bazooka and this also supports lesser nervousness,” Marcin Karasiewicz, a fixed-income trader at PKO Bank Polski SA in Warsaw, said by e-mail Monday.

Poland, Hungary

Risk aversion may escalate significantly unless comments from Greek Prime Minister Alexis Tsipras and euro area leaders suggest that the worst-case scenario of a Greek exit can be averted, Piotr Matys, a foreign-exchange strategist at Rabobank International in London, said by e-mail on Monday.

“We maintain our very cautious approach adopted even before the negotiations collapsed and Tsipras called a referendum,” Matys said.

Tsipras is heading to Brussels in a last-ditch attempt to secure a rescue from European leaders and keep his country in the euro region. German Chancellor Angela Merkel said Monday “time is running out” as she and French President Francois Hollande responded to referendum that backed Tsipras’s anti-austerity stance.

Polish bonds in euros due in 2027 were little changed on Monday after four days of gains at 87.75 cents. Hungary’s notes due in 2019 fell less than 0.1 cent.

For more, read this QuickTake: Financial Contagion

As long as “core” Europe isn’t affected, Greece’s crisis will have very limited impact on countries like Poland, the Czech Republic and Hungary, said Peter Schottmueller, who helps manage $17 billion as the head of emerging-market fixed income at Deka Investment GmbH in Frankfurt.

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