Writing on Friday ahead of the EU summit, Erik Berglöf, chief economist at the European Bank for Reconstruction and Development, said (our emphasis):
There is much to suggest that it was the belief that EU’s leaders will stand by Eastern Europe that prevented a full-blown meltdown last week. A failure to show substantive progress this weekend or over the next few weeks could well trigger a new round of speculative attacks. Strong leadership, on the other hand, would likely calm markets and signal that Europe stands behind its model of growth based on openness and integration.
And yet, fresh from agreeing a €24.5bn aid package on Friday via the EBRD, European Investment Bank and the World Bank, EU leaders at the weekend said “non” to any further assistance as called upon by Hungary in the form of an €180bn appeal. This from Bloomberg:
March 2 (Bloomberg) — European Union leaders spurned pleas for special aid for eastern Europe and a rescue package for automakers, bowing to German concerns over budget deficits as the economic crisis escalates. EU leaders vetoed an appeal by Hungary for loans of 180 billion euros ($228 billion) for ex-communist economies in eastern Europe, and told carmakers such as General Motors Corp.’s European arm to look to national capitals for help.
Beat Siegenthaler at TD Securities believes this is hardly reassuring. Rather, the move risks further financial turmoil in the region and the area will need some form of international help in the end. He explains:
We retain our view that ultimately some sort of international help will be required to reverse the recent trend on the currency market. Last week’s EUR24.5bn package from World Bank, EBRD and EIB is an important step in the right direction. We think that direct intervention by local central banks may be inevitable and that interest rate hikes are also a possibility. Directionally we prefer payer positions in the region although we see more room for higher rates in Poland and Czech than in Hungary.
Sure enough Monday saw Eastern European stocks and currencies tumble on the news. Stocks were down down to five-and-a-half year lows across the region, while Hungary’s forint fell the most in a month. As Bloomberg noted:
The forint fell 2.4 percent to 306.70 per euro, near the record-low of 309.71 on Feb. 17. The Polish zloty declined 2.2 percent to 4.7464 versus the euro, and the Czech koruna depreciated 1.2 percent to 28.458 against Europe’s common currency.TD Securities believes that without a co-ordinated approach in place CEE countries will inevitably have to seek international help on a case-by-case basis.
Before that, however, markets could very well test the region’s central banks’ willingness to protect their own currencies.
Related links:
Eastern Europe gets €24.5bn – FT Alphaville
Crisis in Eastern Europe: Manageable — but needs to be managed – voxeu.org