CEE currencies were on the ascent on Monday, alongside stocks in Warsaw. That was ahead of a much-awaited interest rate decision by the Hungarian central bank at 1pm GMT. The MNB was expected to hold rates despite worsening economic data which would normally warrant an interest rate cut just to support the forint. Meanwhile, on Wednesday the Polish central bank is widely expected to cut interest rates to their lowest level since the fall of communism.
The above means CEE stability will remain firmly on European market minds this week.
At this point it’s interesting to note a slightly different view on the region being put forward by Citi analysts on Monday. While they agree on the general risks, they purport that it’s actually CEE exposure to Western banks rather than Western banks’ exposure to CEE that is the real problem.
Analyst Simon Samuels highlights (our emphasis):
Moreover, unlike virtually all other emerging markets (Mexico being a notable exception), it’s the foreign owned banks that dominate the geography. Whilst having well capitalised, well managed international banks might previously have been viewed as a positive, as they themselves have plunged into crisis and gone to their own taxpayers for bailouts, so the risk that foreign capital exits the region is, we believe, real. This would only exacerbate the already evident signs of weakness. We remain cautious on several banks with exposure to this region.
Samuels’ sums put total loans issued to CEE by western European banks at just over €500b (a minor concern), with only 16 banks having any meaningful CEE exposure. Note the chart below (click to enlarge) which shows Unicredit as the standout party exposed.
On the issue of foreign currency lending and banks’ exposure here, the numbers range from 35-65 per cent for domestic mortgages and from 10-70 per cent for corporates. Note the charts below (again, click to enlarge):
However, according to Samuels, what will actually determine the percentage of non-performing loans is the region’s overall economic under-performance — alongside pressures from foreign currency exposure — a factor heightened by the countries’ overall debt binge as facilitated by the Western banks.
Accordingly he explains:
For 2009, our current forecasts anticipate GDP growth of 4.7% in emerging Asia, 3.0% in Africa, 1.2% in Latin America but a (small) GDP decline in CEE. In addition, we note the banking sector is showing clear signs of stress, with rapid credit formation over the past year (not matched by deposit growth) and relatively high levels of loans/GDP.
In normal circumstances credit generation would have been maintained, helping the region ride the economic malaise. But with foreign banks with CEE subsidiaries under pressure on the domestic front, economic nationalism is likely to prevail. Hence “loans for us, and not for anyone else” future mentatility severely hastening the region’s overall downward spiral, and access to fresh credit. As Samuels puts it :
There are several indicators that, at the very least, suggest the risk of a CEE crisis is real. As well as banking system issues, such as rapid loan growth (see Figures 7 and 8 above) and reliance on hard currency loans (Figures 9 and 10), the CEE region has one other region specific risk — “economic nationalism”.
Strong international banks — well capitalised, well managed with strong risk controls — were perceived as adding to the stability of the local banking system. That may still be the case long term but, in the meantime, many of these international banking groups have to deal with a crisis in their developed market businesses. As this has intensified, so in turn a large number of these banking groups have had to turn to their national governments — i.e. their taxpayers — for assistance. As national governments, understandably, compel the banks in which they are now stakeholders to prioritise their domestic lending, so a potential retrenchment from overseas markets may follow. Hence many CEE countries are acutely exposed to a wholesale rationing of capital.
So it’s CEE exposure to banks “going home”, so to speak, that should really be watched. And on that front, Samuels subjectively estimates it’s the likes of Estonia, Lithuania, Latvia and the Czech Republic that are most exposed. Interestingly he also puts Poland’s exposure to the problem is nearly twice as high as that of Hungary’s, whose economy is in a much worse state.
The art of selling toxic fx options – FT Alphaville
UBS: No Eastern Europe meltdown – FT Alphaville
Domino theory, Eastern Europe edition – FT Alphaville
UniCredit’s Eastern Exposure – FT Alphaville