Europe

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The Balkans’ Suppressed Agrokor Agony

2017 May 21 by

Croatia, Slovenia and Serbia held on to single-digit MSCI Frontier index gains through April following passage of a law to facilitate orderly restructuring at food and retail chain Agrokor, with hundreds of thousands of employees and suppliers across ex-Yugoslavia after it was unable to get emergency commercial loans. The Zagreb government under terms of EU membership cannot guarantee the private conglomerate’s liabilities despite its systemic importance, and such a move would jeopardize fiscal deficit progress at less than 1 percent of GDP last year to lift potential Brussels sanctions. Domestic consumption and investment will suffer pending resolution, and could jeopardize the 3 percent growth target likely with good tourism numbers.  Banks in the sub-region face a blow but may be able to absorb it with  Serbia’s IMF cleanup, Slovenia’s privatization of NLB, and Croatia’s new single borrower rules capping exposure at one-quarter of capital. The local sector has just emerged from the Swiss-franc mortgage conversion mess, and Agrokor provisions will again cramp profitability while the central bank is on standby to offer liquidity. The perennial coalition balancing act could be strained after the main opposition party SDP proposed a no-confidence vote against the Finance Minister, a former senior executive of the company. Another cabinet reshuffle is expected, but the prime minister has fought another election round until alternatives are exhausted to try to advance the economic modernization agenda demanded by EU accession and ratings agencies to forestall further downgrades with the 85 percent of GDP public debt. Balkans interest shifted to Romania amid the fallout as stocks rose 15 percent, but a fiscal deficit blowout to 4 percent, the same as projected growth, has prompted unease. The new government has brushed off IMF recommendations with pension and salary hikes, and was forced to backtrack on a corruption amnesty bill only after massive street protests. The current account gap likewise widened to 3 percent of output despite a weaker currency adjusted for inflation. Interest rates have been on hold but tightening may be forced by the loose budget and a series of scheduled VAT and customs duty increases.

Ukraine has also been a double-digit performer after the Fund released another $1 billion from the $17 billion program and 2 percent growth was achieved in 2016 after years of near-depression. However enthusiasm is muted by the renewed outbreak of fighting in the East coupled with a blockade against the Russia-backed separatists, which President Porochenko, with a 10 percent approval rating, was late to endorse. His former business colleague and central bank head Gontareva resigned her post after spearheading a crackdown against leading oligarchs which won international praise but domestic enmity. In a survey 80 percent of citizens distrusted her policies, and with departure reform momentum may flag at the same time pension and healthcare overhauls are in the works. Privatization of strategic enterprises has yet to resume, and a $3 billion sovereign bond dispute with Moscow is pending in London, while officials have hinted at reopening the recent global deal with commercial holders even as GDP-linked warrants may pay off this year. The prime minister, plucked from a post as mayor, has avoided his predecessor’s corruption taint ahead of 2019 elections, which could be advanced if austerity agony persists.

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The Western Balkans’ Balky Bloc Formation

2017 April 9 by

EU officials, marking the 60th anniversary of the single market and still at odds over issues from Brexit to bank rescue, were at odds again over political and economic direction in the Western Balkans, where investable markets include Serbia, Macedonia and Bosnia and Herzegovina linked on a common securities trading platform. In early March European Council Tusk, after fighting removal maneuvers from his former party rivals in charge in Poland, warned of “destabilization from inside and outside forces.” Germany has led with infrastructure pledges and extra money was dispatched to slow migrant inflows, and Brussels established a unit to counter Russian “disinformation” around conflicts in Macedonia and Montenegro, where Moscow allies may have attempted a coup. Corruption and organized crime remain scourges from the Yugoslavia civil war era, and Serbia’s accession process has been blocked by old enemy Croatia, and several European capitals refuse to recognize Kosovo. A week after Tusk’s remarks enlargement commissioner Hahn exhorted a “single economic development space” for the six states and praised progress on tariff reduction while citing other cross-border trade and investment obstacles. Russia has encouraged Bosnian Serbs to withdraw from the Federation and endorsed the current pro-Putin stance by Belgrade, which is also under an IMF program. The stock market is up marginally on the MSCI frontier index, and GDP growth is forecast at 3 percent as credit recovers at double that pace. Retail and corporate deposits have reached highs as banks write off and sell bad loans cutting the ratio to 17 percent. Local currency reversion is pronounced as the dinar drifts to 125/dollar, and borrowing rates fall to single digits. Renewed access to offshore commercial credit enabled early repayment of previous obligations, and the picture is now brighter than the rest of Southeast Europe where appetite is flat.

Albania issued a sovereign bond during a recent high-yield boom and just completed a Fund arrangement that will be followed with post-program monitoring. Energy projects lifted GDP growth to 6 percent last year and the fiscal deficit shrank to under 2 percent. Inflation was below target at 2 percent and pension, bankruptcy and tax reforms were enacted. However political standoff is due to stall momentum with an opposition party boycott to insist on a provisional technocrat administration before June scheduled elections. The hefty current account gap persists at over 10 percent of output, but FDI and worker remittances offer coverage and increasingly capital goods imports go to building future productive capacity. Bulgaria had a modest MSCI gain as Borrisov’s GERB party, with a centrist pro-Europe stance, looked to form a government again on the region’s best current account performance with a 3 percent of GDP surplus. Tourism has been a bright spot with visitors diverted from Egypt and Turkey and the currency board regime has been unaffected by the euro’s global fluctuations.  Romania rose double-digits on the MSCI frontier on a current account deficit of the same magnitude starting to worry investors on a combination of domestic demand overheating and foreign reserve depletion pressures. Lower VAT and pension and wage hikes have eroded a prudent budget reputation reinforced by an IMF backup facility, and the central bank may soon be forced to tighten monetary policy to seal foundation cracks.

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Russia’s Crossed Wire Winnowing

2017 March 19 by

Russian shares languished at the bottom of the MSCI Europe pack into March as President Trump’s wiretapping allegations against his predecessor redoubled controversy over previous campaign connections acknowledged by senior officials and under investigation by the US Congress and law enforcement arms. The entanglement continued to raise questions about election interference and cyber-attacks against Washington and critical infrastructure, and sidetracked calls for Ukraine incursion sanctions easing as conflict also worsened there. The recession is over with the oil price again at $50/barrel and inflation may halve to 5 percent with ruble recovery, as the central bank holds rates and limits currency intervention. Single-digit valuations remain at a discount to emerging market peers, but foreign investors have turned wary of domestic legal and political risks alongside additional cross-border intrigue in Europe and the Middle East. In the region Kremlin associates were reportedly implicated in a coup attempt in Montenegro and a Moldova banking scandal unseating the government. Moscow may also demand harsher terms for another bailout of Belarus in the Eurasian Economic Union, after President Lukashenka’s IMF program overtures were spurned. Putin nemesis Navalny was arrested on fresh charges designed to prevent participation in next year’s presidential contest, but he plans to continue campaigning through detention. Human rights campaigners were further appalled by legislation to decriminalize spousal violence, and eyewitness accounts of civilian bombardment by Russian war jets in Syria, where Aleppo was retaken by Assad forces. With the post-2014 financial crisis ebbing state-owned giant Sberbank has revived earnings and the Kudrin structural reform blueprint, which received attention at its height, has faded into the background. Anti-corruption discontent has likewise dissipated, with news of Prime Minister Medvedev’s lavish spending while rejecting elderly pensioner pleas for a raise eliciting a shrug.

However rapprochement with Turkey, where equities have veered positive with a near 10 percent gain, has deepened in recent months, with a mutual pledge to quintuple bilateral trade to $100 billion, and establishment of a Turkish military buffer zone in Syria to battle ISIS and Kurdish rebels. A Russian company is building a nuclear plant, extending energy cooperation as half of Turkey’s natural gas imports are sourced from Moscow. President Erdogan’s sweeping arrests of business executives and government officials after last year’s failed coup has met with no protest, and the seizure of big companies for alleged Gulenist conspiracies has replicated the Kremlin model. Proposed constitutional revisions going to national referendum would allow the President terms to run until 2029 under expanded powers. Deputy Prime Simsek, sidelined as an economic reformer, admitted a short-term “mess” with the lira at a record low and meager growth, but urged investors to stay the course for political system overhaul. The central bank refuses to outright raise rates under presidential hectoring as the regime intends to consolidate large bank and corporate holdings in a sovereign wealth fund to increase economic control and leverage. With private borrowing external debt/GDP is 30 percent, and rollovers may not be as smooth with exchange rate and operating setbacks. Fitch stripped investment grade status in February with expectation of corporate restructuring volume despite the 3 percent headline bad loan number, and a temporary return to double digit inflation as the Islamic Party leadership doubles down on wiring popular dominance.

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Kazakhstan’s Contrived Constitutional Corollary

2017 March 19 by

Kazakh shares were up almost 30 percent to head the MSCI frontier list through February as President Nazarbaev proposed constitutional changes to decentralize power and chart a succession path, and the two biggest state banks were merged with a $6 billion infusion after the IMF called for “prompt” action in its Article IV report. The 75-year old leader announced 35 amendments that will transfer more authority to the cabinet, parliament and provincial bodies following working group consultations nationwide that spurred over 5000 submissions for post-independence charter improvement. The political transition roadmap was outlined as the country tries to balance its diplomatic and geographic position between China and Russia, and the Fund brightened the GDP growth and inflation forecasts to 2.5 percent and 6.5 percent within the target range respectively. The currency strengthened to 310/dollar in March, and exchange-listed privatizations, with major infrastructure and natural resource firms on the block, are designed to cut the non-oil fiscal deficit to 5 percent and official ownership control to 15 percent of GDP by end-decade. Growth last year was 1 percent with the oil price rebound and housing and small business support through a dedicated program to increase domestic demand. Banks remain a weak spot although dollarization has slowed to half the system, according to the central bank. Ratings agency Moody’s in a February survey cited near-term solvency risks with bad loans stuck near 40 percent of the total, and net interest income to stay low among the thirty competitors.  Around 40 percent of non-performing assets are lodged at Halyk and Kazkommertsbank, and they will combine after the government agreed to absorb big problem lines, including outstanding credit to another rescued lender BTA, which defaulted on external bonds. Two small institutions got into trouble in recent months for non-payment and one lost its license as the IMF recommended more interventions and liquidations in the February review.

Ukraine rose 20 percent on the MSCI Index, despite renewed separatist fighting in the east and Russia’s lawsuit in London pressing for $3 billion bond repayment, as another $1 billion was to be released under the IMF arrangement following 5 percent last quarter growth. Trump administration views on the conflict have not been articulated despite expressed desire for warmer Moscow ties, although an oligarch close to former campaign chief Manafort was extradited from Austria to the US on bribery charges. Banking reform has been a clear triumph for the Poroshenko government with half the sector shut down after a comprehensive sweep. The central bank after initial delay took on the country’s wealthiest individual and seized the biggest participant Privatbank after finding a $5 billion capital hole from related-party transactions. Capital controls may be gradually lifted as rules were recently eased on foreign exchange trading. The NPL ratio is 30 percent, with domestic banks in the worst shape and Western and Russian-owned ones just bruised, but Sberbank’s portfolio worsened the past two years under dual crises. The headline capital adequacy number is 15 percent of assets, but masks wide differences in institution health. Profitability has not returned and large maturity mismatches endure with corporate and retail exposures. The parliament guaranteed all state bank deposits last year in a bid to restore confidence but not necessarily fiscal health which is also in the Fund rehabilitation orders.

 

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Greece’s Explosive Expulsion Exclamation

2017 February 27 by

Greek shares continued to slip as Euro-group Finance Ministers met to consider program status with fund release “unthinkable” ahead of a big July repayment according to its head, and the IMF still not on board against fierce criticism from top bilateral creditor Germany. EU Commissioner Moscovici reiterated support for its single currency membership, as the central bank governor warned of a repeat of 2015’s “vicious cycle” of previous suspension and an “explosive” debt burden toward aid’s 2030 end. The economy again tipped into recession in the last quarter, but 2-3 percent growth is projected this year with debt at 180 percent of GDP the Fund describes as “unsustainably high.” The statistics do not capture the informal sector believed to account for one-quarter of output, with anecdotal evidence suggesting an increase as small firms enter to escape harsher tax collection. The 2016 half a percent budget primary surplus target was beat by almost 2 percent, but the 2014 commercial bond yield spiked to 15 percent ahead of July’s overall $7 billion due to external holders, including the European Stability Mechanism on the hook for two-thirds of the load after transferring EUR 175 billion. Prime Minister Tsipras vowed “not a euro more” in austerity as opinion polls show the reinvented conservative New Democrats ahead 10-15 percent in possible early elections. The IMF periodic staff review urged more “realistic” forecasts and goals, and additional debt and primary surplus relief, but German Finance Minister Schaueble led the rebuttal with insistence on the existing reform and stabilization strategy to stay in the Eurozone. Dutch counterpart Dijsselbloem joined the counter in questioning the “dated, too gloomy” report as these officials turned attention to potentially ore overwhelming core blowups in Italy and France.

In the former both resigned prime minister Renzi’s PD party and the 5 Star movement calling for a euro referendum have 30 percent voter backing before new elections, with banks responsible for one-third of the bloc’s bad credit. Growth is flat, and Monte de Paschi and Unicredit, with a once extensive Eastern Europe network, are struggling to raise private capital within guidelines set by the regional supervisory authority. French benchmark bond yields passed 1 percent and reached a 4-year high versus German peers as National Front standard-bearer Le Pen may be in striking distance of eventual presidential victory with the mushrooming scandal surrounding rightist candidate Fillon, who allegedly had his spouse on the official payroll without documented work. The Front’s trade and monetary plans have spooked investors, with recommended contract redenomination in the old local franc currency to assert “sovereignty” and import and immigrant bans as elements of “intelligent protectionism.” Portugal and Spain remain on the periphery watch list with persistent banking and debt troubles as well. Portugal’s growth is just 1.5 percent, and the OECD noted that investment is one-third lower than a decade ago with bad loans 15 percent of the total after a Chinese capital injection into system heavyweight BCP.  Spain’s expansion was over 3 percent last year in a “cyclical recovery” in the IMF’s view helped by cheap oil imports. Unemployment lingers around 20 percent, and multinational bank BBVA earnings greatly rely on Mexico and Turkey in dizzying political and geopolitical cycles.

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The Czech Republic’s Flailing Floor Plans

2017 February 6 by

Czech Republic equities after a 10 percent MSCI loss in 2016 were thrown by December’s 2 percent on-target inflation showing, which could mark abolition of the post-crisis 27/euro currency cap introduced during deflation. Two original peg backers on the central bank board leave in February as speculation mounted that the rate could be freed in the second quarter. Rising oil import prices and food taxes were major causes of the uptick, as the core level stays under 1.5 percent, and officials are cautious about the longer-term trend and also about potential euro weakness against the dollar with Washington’s new fiscal and monetary policies. Despite the government’s increased pro-business leanings the stock exchange has been quiescent with scant trading and offering activity as it reconsiders alliances and platforms with neighbors. Hungary has continued its own route after the bourse’s central bank takeover, designed to encourage small firm access and privatization restart with limited success so far, although it was up over 30 percent last year. Inflation there could return toward 3 percent on labor shortages, but interest rate firming is out of the question with the unconventional monetary approach still stressing discount commercial on-lending. Prime Minister Orban has redirected his fire from Brussels to perceived unelected critics at home, including the Soros Open Society Foundation. In the wake of communism’s collapse his political party was an ally, but in recent years and especially following the Mideast refugee influx, it has been accused of internal meddling and opposing “Hungarian values.” With border fence placement the movement has stopped and the country has tried to divert asylum-seekers to Germany and elsewhere. In Poland, also MSCI-negative in 2016, inflation is within the 2.5 percent mid-range goal with the benchmark rate unchanged at 1.5 percent. GDP growth in Q3 was under 1 percent as the ruling Law and Justice Party got off to a rocky start and alienated wide swathes of the banking community and electorate with hard line mortgage conversion and social issue stances. State insurer PZU’s purchase of a controlling stake shed by Italy’s Uncredit in Bank Pekao will put the largest lenders in government hands for the first time since the 1990s, and overseas competitors  have expressed concern although management and operations will stay independent. Parliament has been gridlocked by a Civic Platform boycott in protest of proposed media and abortion restrictions and the new budget passed with procedures it calls illegal. The standoff coincided with a European Commission notice of “systemic threat” to the rule of law, which Warsaw roundly dismisses.

The maneuvering also overlapped with NATO military exercises led by US forces as Russia moves to regain Eastern Europe sway. Shares have sustained double-digit leaps with recession ending and inflation falling toward 5 percent, but former Finance Minister Kudrin in another economic reform blueprint warned that security was in danger from lagging technology and modernization, including the inability to dismantle state ownership which has surged to 70 percent of output. Privatization plans have been rolled back with higher oil revenue and reserves, which may again enable regular ruble intervention. Despite a “tough year” in the central bank’s words for the banking industry retail giant Sberbank may turn in a $15 billion profit for 2016 with its hold on one-third of assets still an ironclad ceiling.

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Turkey’s Nightclub Spotlight Spleen

2017 January 23 by

Turkish shares and the lira continued with double digit losses at the rear of the major emerging market pack as a New Year’s nightclub assault added to a string of mass casualty incidents claimed by ISIS and Kurdish rebels, following third quarter figures showing the economy in recession after the failed coup attempt and tens of thousands of arrests. Government and military officials were fired and detained in the first crackdown phase, which has since extended to business executives tied to exiled opposition leader Gulen, allegedly the putsch mastermind with US support. President Erdogan promised no letup in the anti-terrorism campaign at the same time he is preparing a referendum on expanded constitutional powers, which Deputy Prime Minister Simsek in charge of economic policy lauds for longer-term political stability after absorbing millions of Syrian refugees and increased internal and external security threats. The currency was last year’s worst performer with a 17 percent dollar decline, and the central bank must contend with possible return to 10 percent inflation as depositors switch to foreign exchange accounts, and companies face a $200 billion mismatch in overseas borrowing which may curtail smooth rollovers since the 2013 “taper tantrum.” The lira also sank then but the benchmark interest rate was hiked 4 percent to restore confidence, an option dismissed by the President’s team who call for lower costs and domestic currency embrace in the name of patriotism. Officials have tried to loosen dollar and euro liquidity through technical measures, while the chronic 5 percent of GDP current account deficit must be financed as foreign investors slash local bond positions. On the stock market allocation has been confined to big dollar earning listings that can also steer clear of Gulenist connections and suspicions, and their US ADRs have suffered further on uncertain diplomatic relations with the new Washington administration, despite a Trump Tower joint venture version in Istanbul. President Trump is however expected to back Cyprus reunification as a longstanding goal, with the island’s two sides continuing negotiations in Geneva. A breakthrough could reduce fiscal aid pressures on Ankara, as the Greek part emerges from its EU bailout with the biggest bank repaying emergency funds. Both countries are otherwise at odds as Turkey demands the extradition of generals who fled to Athens after the coup, against resistance from Greek human rights activists.

 

The lira lurch has been matched only by Mexico’s peso’s plunge, underway since the central bank governor described proposed Trump trade and immigration steps as a “horror film.” It intervened as the level passed 20/dollar, but immediately usable reserves may be in the $15-20 billion range with a large IMF contingency credit line untapped. Following Presidential hectoring to keep jobs at home Ford Motor reversed course about a $1.5 billion Mexican plant, triggering downgrades in 2017 FDI projections to around $30 billion. To mollify cross-border tensions, President Pena Nieto named his former Finance Minister, who resigned under a cloud of sweetheart housing deals, as Foreign Minister after Trump praised him during a controversial campaign visit. GDP growth this year will be just 2 percent and energy prices were raised in line with Pemex reforms at the beginning of January to public outcry. Perennial presidential contender AMLO has benefited from the backlash to emerge as the frontrunner for the 2018 vote, but he squandered big margins before and could again hit his own wall.

 

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Ukraine’s Borderline Bank Rescue Recoil

2017 January 3 by

Ukraine bonds solidified EMBI index double-digit gains after the central bank, following months of hesitation in directly confronting industry leader Privatbank’s $5.5 billion capital shortfall, seized it in a move that will swell the budget deficit that must stay within 3 percent of GDP under the IMF program, and exact bank bondholder pain under bail-in provisions. President Poroshenko appealed for calm and submitted legislation to further protect its 20 million depositors, as the political opposition lambasted the bailout as a “great robbery” and called for fresh snap elections. Shareholders headed by well-known oligarch Kolomolsky, who underwrote military operations to eject Russia-backed rebels from the East, had put in millions of dollars in a last-ditch bid to shore up the institution with a 40 percent bad loan portfolio and near-default credit rating, after rival Delta Bank was closed last year for prudential violations. The magnate had fallen out of favor as the border conflict drew to a standstill and suffered losses on other business holdings on meager 1.5 percent GDP growth this year. Ukraine may soon be left to face the incursion on its own as incoming US President Trump has placed warmer relations with Russia seemingly higher on the agenda to include possible sanctions removal. Banking and geopolitical woes have overshadowed energy reform as Naftogaz tariffs went to full cost recovery, and anti-corruption agency and electronic tax filing launch which met Fund disbursement criteria. Releases continue to be delayed but front-loading and replenished reserves have reduced urgency, and the government pledges to tackle outstanding pension and privatization issues in the coming months assuming survival of no-confidence votes. Inflation is to fall to single digits in 2017 within a target band, but the currency could again falter toward 30/dollar to undermine control. So long as Russian commercial restrictions remain in place and the Dutch and other reject EU bilateral free trade, depreciation will offer only a limited export boost and the current account gap will be frozen around 4 percent of GDP and depend on future official financing to bridge it. In FDI agriculture has been a bright spot as the country may soon ranking third globally in food output after the US and Brazil. Giants like Archer-Daniels, Cargill and Bunge have leased vast local tracts, with outright ownership still prohibited and sales subject to a moratorium through 2018. The richest lands are located in the war zone around Donbas, and operations there have been erratic with fighting eruption despite a nominal ceasefire.

Russian stocks continued to rally as Emerging Europe champions notwithstanding the prospect of new US congressional penalties for cyber-attacks to affect the presidential contest. Oil price rebound to over $40/barrel has been the overriding positive economic story against the backdrop of persistent recession and 5 percent-plus inflation. Although mortgage rates have reverted to pre-crisis levels, consumer borrowing and sentiment is lackluster, with retail sales off 5 percent in October. President Putin, who will decide on another run for 2018, has charged the Finance Minister with drafting an ambitious structural reform agenda, but previous blueprints were routinely ignored. The central bank stayed on hold and reiterated the importance of ruble free-float as an eventual competitive safety valve, but many foreign investors preferred to focus on the Trump Administration’s tapping of former Exxon chief executive and Putin ally Tillerson as Secretary of State for a tactical buy.

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Central Asia’s Frozen Financial System

2016 December 21 by

A new World Bank report examining Emerging Europe and Central Asia’s 25-year financial sector reform record cites recovery since the 2008 crisis, with lingering weakness in a boom-bust credit pattern and lack of non-bank and securities market diversification. Regional bad loans average almost 10 percent, and compliance with Basel III and EU regulations has been elusive particularly in the least open eastern economies. Several countries at different development stages including Russia, Turkey, Armenia and Tajikistan signed the Maya Declaration on financial inclusion without underlying resilience to reach targets. Since independence banking’s fraction of GDP quadrupled to 55 percent but the late 1990s and 2000s featured consecutive crashes sparing only the least integrated and backward systems. Liberalization and control trends have exacerbated swings, and liquidity bubbles illustrated by 200 percent range loan-deposit ratios joined with foreign currency mismatches for major shocks. The “spare tire” of other savings products through insurance and capital markets lags other developing regions, and policymakers should set priorities across the matrix of stability, efficiency, inclusion and depth considerations for better performance, according to the study. From a long-term growth standpoint the greatest impact is through deeper engagement and penetration of households and firms, with the latter benefiting especially from stock market new equity issuance. Small business access is limited and low bank trust, around 50 percent in surveys, inhibits individual participation. However splits between expanded use and soundness and other factors are “inadequately addressed” as central banks, finance ministries and government agencies often work at cross-purposes and lack overarching strategies. The IMF and World Bank were involved in early efforts but country authorities have increasingly assumed ownership as in Ukraine’s working group approach under its latest aid program. These blueprints have improved over time but still fail on basic communication and coordination measure and are frequently absent altogether, leaving officials, intermediaries and investors without a common design.

Central Asia and Russia have the most scope for better balance, while Armenia is among the bottom-up leaders still missing overall sophistication. The Czech Republic and Poland are the strongest across indicators, while the Western Balkans is behind on efficiency. Turkey’s emphasis should be on stability through macro-prudential limits with recent years’ credit volatility, the authors suggest. They conclude that the top challenges should be tackling high NPLs, establishing cross-border supervision, running crisis simulations, overhauling state bank governance, and broadening electronic payments networks. Capital markets are often small and could achieve scale with neighbor tie-ups, but international financial center ambitions as in Istanbul, Astana and elsewhere may be extreme. Private pension fund schemes that build the institutional investor base have been overlooked and their portfolio guidelines should not be weighed down with government funding requirements. Poland’s pools shrank with recent social security takeovers and the stock market was off 10 percent on the MSCI index through November. Frontier components with nascent or absent “pillar 2” frameworks were mixed for the period, with Croatia and Ukraine leading the pack with over 15 percent gains; Lithuania and Slovenia with heavy losses; and Estonia, Romania and Serbia flat to modestly positive on shifting spare tire readiness.

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Greece’s Unrelieved Debt Digression

2016 December 14 by

Greek stocks joined European neighbors with double-digit losses through November after US President Obama on a valedictory visit prodded Brussels for further official debt cancellation, and German Finance Minister Schaeuble dismissed it as a “disservice” ahead of a December Eurogroup meeting dominated by French and Italian election angst. The IMF has argued for an additional break as well while still refusing to participate in the latest program, despite Economy Ministry criticism. The Stability fund holding sovereign bonds may consider long-term fixed rate swaps extending and reducing the load in net present value terms, but operations have yet to be approved. GDP growth was almost 1 percent in Q3 on the best export and consumption performance since 2008, but recession will linger this year before 1-2 percent expansion predicted in 2017, when a 2 percent primary fiscal surplus is the target. Bank deposits rose in October, but the overall EUR 125 billion is the lowest since the early 2000s. The bad loan ratio is stuck at 40 percent as a “huge problem,” according to the Eurozone single supervisor, as Piraeus and National Bank look to enlist foreign distressed debt managers so they can again increase private sector credit, but mortgage foreclosure rules remain in flux and exporters are owed EUR 1 billion in tax rebates clogging cash flow. Prime Minister Tsipras’ popularity is at a nadir as the New Democrats reconstitute under a new leader pledging a business-friendly platform. They have attacked his party’s economic and diplomatic agendas, the latter under fire with rupture of Cyprus reunification negotiations. Island growth has reached 3 percent for a post-crisis high, with tourist arrivals up 15 percent in Q3 on diversion from Mideast security scares.

Turkey with its own 15 percent stock market decline has been a reluctant partner as it also is in a tussle with the EU on a refugee aid for visa-free access deal, with just the first EUR 600 million received of over EUR 3 billion promised. Brussels has criticized President Erdogan’s jailing of thousands of opponents after a failed coup attempt and his proposal to expand the post’s constitutional powers. The lira crashed toward 3.5/dollar as he repeated suspicions about an anti-Turkey foreign conspiracy and calls for lower interest rates. The central bank commandeered reserves to support the lira and then reversed course to lift the benchmark rate, which should also brake the 5 percent of GDP current account gap. Growth is in the lackluster 2.5 percent range despite loosening of macro-prudential consumer loan limits, and the currency pass-through threatens double-digit inflation revival. Russian trade and tourism rebound should help accounts into next year, but business confidence will stay shaky with the mass civil servant firings and a previewed referendum on presidential authority which will require parliamentary backing from outside the ruling party. The Czech Republic and Poland have been other share losers, with a coalition reshuffle and speculation over the future of the euro-koruna peg in the former and further relaxation of budget constraints in the latter with reduced mandatory retirement age. The populist government continues to brandish tax measures against foreign banks and retailers, and the 55 percent of GDP public debt statutory ceiling may be formally breached in the confused processes.

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