It’s old news now that the Central and Eastern European patient is sick. We’ve been writing about the estimated $1.25 Trillion exposure of euro-region banks over the last weeks. Austrian banks alone (Raiffeisen and Erste Group banks in particular) have some $280 Billion of exposure to E. European countries, or 64% of the country’s GDP.
On Friday the World Bank, the European Bank for Reconstruction and Development, and the European Investment Bank took action to address the region’s ails, providing a 24.5 Billion Euro relief package to Central and East European banks and businesses. Collectively, the aid will take the form of equity and debt financing, credit lines and political risk insurance.
Bailouts are nothing new in this region. The IMF has already bailed out Latvia, Hungary, Serbia, Ukraine, and Belarus. Yet Europe’s lagging financial crisis (with reference to the US) is finally calling policy makers to action. On Thursday we reported on the UK’s establishment of a Bad bank for toxic assets and the Treasury’s guarantee of some 325 Billion Pounds ($462 Billion) for mortgages and loans to middle to lower income earners.
Friday’s aid to Central and East European countries comes in the face of the horrendous economic numbers we’ve been sorting through over the last weeks. Some of the outliers include: Latvia, a country that saw its GDP contract -10.5% in Q4 ’08 and is forecast to fall to -12% this year and the Ukraine, which saw industrial output plummet -34% in January. Both countries recently had their credit ratings downgraded to BB+ and CCC+ respectively as fear of default on their debt becomes a looming proposition.
In aggregate Central and East European GDPs, currencies, exports, outputs and credit ratings have plummeted while unemployment and bond yields have increased; looking forward the IMF forecast that GDP in Central and Eastern Europe as a whole will shrink 0.4% this year. That’s a very aggressive estimate. Much of the initial boom in the region was funded by “Western” banks like Raiffeisen in Euro and Swiss Franc denominated loans. With the severe devaluation in currencies (see below) like the Polish Zloty at -11.8% versus the Euro, default risk has risen.
Other confirming negative data points include the contraction in capital flow, estimated to fall from $254 Billion in 2008 to $30 Billion in 2009, or -88.2%. We’re also seeing current account deficits (for 2008) rocket upward.
One of the main risk factors that nations have wrestled with —will the European Union be able to afford to help their Eastern neighbors?
Hungarian Prime Minister Ferenc Gyurcsany announced on Friday that he wants the European Union to arrange a package of as much as 180 Billion Euros to help Eastern European economies, banks and companies. He presented the plan formally yesterday at a EU summit in Brussels, and it was outright vetoed. The package was aimed specifically at Bulgaria, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland and Romania (EU members); Croatia and Ukraine (non-EU states); and Slovakia and Slovenia (Euro-region economies).
Gyurcsany’s plan calls into question the willingness of Europe’s stronger nations to bail out the weaker ones. While German Finance Minister Peer Steinbrueck stated on 2/17 that euro-region countries may be forced to bailout other members of the Union that face problems refinancing their debt, it appears unlikely the German opinion would support such a measure when Germany is dealing with its own severe contraction. German unemployment rose to 8.1% in February from 8.0% M/M and recently released data shows that Q4 ’08 GDP fell 2.1% and Exports declined 7.3% on a quarterly basis. And similar stats could be listed for Italy and France. The European Commission predicts that the EU’s $17 Trillion economy will shrink 1.8% this year.
The large nations of Europe may need to decide quickly. Recently, Romanian central bank advisor Eugen Radulescu said Romania needs 10 Billion Euros to cover its current account and budget gaps.
We haven’t been long anything in Europe in 2009, and we remain bearish on Europe as a whole. Sunday’s veto by EU leaders of Hungary’s proposed Eastern European bailout signals that more may not be in store for the region.