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FT: Debt troubles hit central Europe

By Jan Cienski in Warsaw and Chris Bryant in Vienna
Published: February 5 2010 18:46 | Last updated: February 5 2010 18:46

Central European currencies softened and stock markets dropped on Friday as the region’s financial community reacted to the troubles experienced by the debt-laden economies of Greece, Portugal and Spain, but the overall impact of the turmoil in the eurozone was smaller than expected.

Unlike a year ago, when the region had been seen in danger of a meltdown due to the global economic crisis, investor interest in the more solid economies of central Europe such as Poland and the Czech Republic remained strong.

The Warsaw stock exchange's broad WIG index was down 3.29 per cent on Friday while the Prague exchange fell by 3.6 per cent. The zloty fell by 0.42 per cent to 4.09 against the euro.

Euro-denominated bonds were still in demand and Polish credit default swaps were 149 basis points, or $149,000 to insure $10m debt annually over five years, more than half of Greece, while Spain was 161bp. The Czech Republic was at 87bp, more or less the same as the UK, a G7 country.

“We are a safe haven,” said Dominik Radziwill, Poland’s deputy finance minister, who helped place a €3bn 15-year bond issue last month. “We have become an alternative for investors who are looking at the periphery of Europe. We can see an increase in interest on the part of foreign investors in Polish debt.”

A key reason for the muted market response was that investors had learnt to differentiate the countries of the region, said Lars Christensen, emerging markets economist with Danske Bank.

“The high quality central European countries like Poland and the Czech Republic look significantly better than Greece, Spain or Portugal,” he said.

Poland was the only EU country to not fall into recession last year, reporting growth of 1.7 per cent. The government is predicting growth of 3 per cent in 2010, with the deficit at 6.9 per cent of gross domestic product and public debt near 55 per cent of GDP. It is particularly attractive for investors because interest rates are higher than in the euro-zone and the zloty is expected to continue strengthening after the tumble it took following the collapse of Lehman Brothers in September 2008.

The Czech Republic, which has the most solid banking sector in the region, reported a contraction of 3.9 per cent in 2009, while growth of 1.3 per cent is forecast for this year. The deficit for 2010 is expected to be about 5.3 per cent of GDP.

Market confidence in Hungary and Romania – both IMF aid recipients – has also increased but significant political and fiscal risks remain, with Mr Christensen saying that those economies face the greatest jeopardy of contagion from western Europe.

Hungary successfully issued $2bn of ten-year debt last month after finance minister Peter Oszko told the Financial Times that the country no longer required assistance from the IMF’s €20bn programme.

The forint gained about 15 per cent after a technocratic government took over last April and promised to cut Hungary’s budget deficit to 3.9 per cent last year, among the most frugal budgetary targets in the European Union.

However, investors remain concerned about national elections in April that are likely to return the opposition Fidesz party to power.

Fidesz has warned that this year’s budget deficit could be around twice as high as the current government’s target of 3.8 per cent, which the IMF has said it will not tolerate.

Government debt is in any case expected to reach 80 per cent of GDP this year.

The perception of risk in Romania has improved markedly since January, when parliament passed a budget, allowing the IMF and European Union to unblock more than €3bn in financial assistance.

Romania’s new government has frozen public sector wages and pensions in order to cut the deficit to 5.9 per cent in 2010, from 7.3 per cent last year.

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