Europe

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Ukraine’s Backward Leaning Liability Lull

2017 October 2 by

After a Moody’s ratings upgrade from the low junk category, Ukraine bonds rallied on a post-default market return as $3 billion in issuance split between rollover and new money was doubly oversubscribed at a 7.5 percent yield around the current secondary level. Buyers seemed to slough off concerns about the war with Russia, which won initial judgment in London for payments outstanding under the previous regime, and the 2015 20 percent haircut as the transaction followed a string of other far frontier sovereign bond taps including Iraq and Tajikistan. President Poroshenko called it “unbelievably positive” and the Finance Minister “transformational” despite lapses in the $17.5 billion IMF program now with lukewarm support from the Trump administration and subject to “backward risk” in the words of the Fund’s number two official. GDP growth is now positive but a long way from overtaking the near 20 percent output collapses from 2014-15, and energy, pension and anti-corruption reforms have stalled after early momentum. The courts have interfered with actions taken by the new integrity bureau, whose head has been publically threatened by the media and lawmakers under investigation. The President himself, with his popularity at a single-digit low, has fended off attempts by the panel to pursue allegations against his intact business empire. Heading into winter natural gas tariff raises are overdue for state company cost recovery, which will sustain 15 percent range inflation. A full accounting of the hole in the public pension system has yet to be made, and bank cleanup is still proceeding after the takeover of Privatbank, where auditors Price Waterhouse were found to miss a $6 billion balance sheet gap.

In Russia, the only MSCI core stock market in the red through August, the central bank uncovered a bigger defect at “systemically import” Okritie Bank, the leading private lender. The new local rating agency set up by the government before had downgraded it, spurring a deposit run. Supervisors accused it of “sugarcoating” the books by inflating the value of Eurobonds acquired as Western sanctions for the Crimea invasion restricted external investment. The bank’s head was a well-known trader and bought a portfolio of smaller institutions with cheap post-2008 crisis state funding. With nationalization through a 75 percent stake management was dismissed and another shaky private competitor, B&N Bank was also taken over soon after. With the moves Sberbank, with over $400 billion in assets and a 25 percent earnings jump the last quarter, solidified its dominance as analysts predict the official share of the sector could reach 80 percent. Their support could be essential abroad as well as Rosneft maneuvers to provide Venezuela a credit lifeline in exchange for additional oil field access and ownership. It already retains the right to seize 49 percent of US outlet Citgo in the event of Caracas’ joint venture lapses, while Treasury Department limits may hinder eventual overall workouts with a future debt investment ban. Meanwhile, VTB the second leading government provider, is under fire in Washington for its reported links with the Trump campaign including a post-election meeting with his son-in-law whose New York properties were in need of refinancing under backward cash flow.

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Russia’s Singeing Sanctions Stretch

2017 September 5 by

Russian stocks continued outlier double-digit losses despite a pickup in Q2 GDP growth to the 4 percent range as US President Trump reluctantly signed new punitive measures against individuals, state banks and energy companies passed overwhelmingly in Congress, which also consider extending post-Crimea and Ukraine invasion punishment to sovereign debt investment. The Treasury Department will study the issue and report back early next year, but the timetable could be accelerated on evidence of Moscow’s further military forays and 2016 presidential election tampering. President Putin decried the action after holding cordial meetings with the Trump team at the recent G-20 summit, and retaliated with expulsion of half the American Embassy staff in the capital. The fighting could literally escalate as Washington reportedly may begin funneling arms to Kiev to repel Eastern rebels who have declared a breakaway Donbas Republic. The push could coincide with more erratic performance under the IMF program, as defense spending has undermined original fiscal discipline commitments despite recession escape and currency stability helping to fuel a 15 percent MSCI frontier index gain through July. Russian industrial output was up 5 percent in June, but retail sales are still flat with lackluster consumer sentiment, prompting retail giant Sberbank to slash mortgage rates to lift confidence. FDI had recovered last year to $13 billion and US banks and companies were again exploring ventures, but momentum may be derailed with the fresh sanctions provisions targeting cyber-security, infrastructure project and “corrupt” privatization broadly. The last category has made headlines with the $3 billion asset stripping lawsuit filed by oil behemoth Rosneft, after taking over rival Bashneft formerly owned by industry conglomerate Systema, after its chief executive fell out of Kremlin favor and was placed under house arrest. The clash underscored perennial corporate governance dysfunction structurally discounting the market P/E ratio to single digits and Rosneft’s high economic profile as it also negotiates additional concessions for Venezuela oil fields after accumulating a 49 percent position in US chain Citgo for collateral in its main joint venture.

As the country skirts possible bond default under pariah status with President Maduro’s installation of a replacement assembly, Russian lenders may be ready to offer backstops, but the sector has been blighted with hundreds of closures ordered by the central bank since 2013. The latest is 30th ranking Yugra, which “manipulated” and falsified accounts to fool depositors and regulators. The bottleneck has occurred against the backdrop of notable strides otherwise in the World Bank’s Doing Business indicators, where Russia and neighbors have led all regions since 2010 according to a companion report. At the same time as the reinforced Washington estrangement, relations with Turkey have turned cozier after a brief trade boycott for plane destruction in Syria ended. The stock market there in contrast is up 35 percent this year on tax, spending and credit stimulus supporting 5 percent growth on the anniversary of 2016’s doomed coup. President Erdogan recently met again with his Russian counterpart, who unlike officials in Brussels has refrained from criticizing mass detentions and firings of government and media workers accused of anti-regime sympathy. He has also seized company stakes and pooled them into a $200 billion sovereign wealth fund for infrastructure outlays, while exhorting private banks to relax their grip from pre-coup torn balance sheets.

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Greece’s Aging Tour Act

2017 July 14 by

Greek stocks were up almost 30% through mid-year as Euro area finance ministers approved the rescue program’s EUR 8.5 billion in June for a small net infusion after official and private bondholder repayment, and committed to further debt relief to keep the IMF on board.  The ECB has Fund participation as a precondition to possible government bond buying under quantitative easing, and the Washington agency and Germany remain at odds over growth and servicing calculations guiding sustainability. The 3.5 percent primary budget surplus target is intact for the next five years, and the Tsipras government, which hailed the “landmark” agreement, must complete other moves including professional services opening for full disbursement. Economic and business sentiment readings went above 90 and the PMI entered expansion for the first time in a year on the news, as tourism revenue increased 2.5 percent from January-May in part reflecting security scares in rivals Egypt and Turkey. The National Bank of Greece, a big exchange listing, sold more Balkan assets including its Romania subsidiary, but continues to struggle with its bad mortgage portfolio after home prices halved since the crisis. Moody’s upgraded the “C” rating with a positive outlook on output and fiscal stabilization, but cautioned about high political risk and reform delay. Cyprus’ visitor numbers have also picked up as Q1 GDP growth was a post-crisis high 3.5 percent, with unemployment down to 12.5 percent. A 7-year EUR 850 million Eurobond was oversubscribed at a yield 100 basis points lower than a year ago, which will partially go to early IMF repayment.

Speculation mounted about possible reunification talks breakthrough after the UN praised progress, and the Turkish side seemed to be more amenable to compromise with preoccupations at home on economic and political threats. The MSCI Index gain tied Greece on near 5 percent growth stoked by budget stimulus, in contrast with the record of basic balance over the past decade.  Public debt is less than 30 percent of output, but domestic borrowing costs and reliance have jumped, as bank Treasury bond buyers are also pressed to use a government guarantee scheme for priority small business and infrastructure project loans. Worker social security obligations were postponed and agricultural subsidies hiked. President Erdogan has also warned the central bank against tightening despite 12% inflation in a bid to maintain popularity as hundreds of thousands of civil servants are purged and educated professionals flee fearing arrest. The main opposition party has turned to a group protest walk across the country as a mobilization tool, which may spur another crackdown. Heavy handed tactics by security forces also were condemned after a visit to Washington when presidential guards attacked Turkish embassy marchers. Alleged lobbying and efforts to extradite exiled spiritual leader Gulen by ousted Trump national security aide Flynn also provoked a backlash. Eurobond issuance was over $6 billion from January-May, and the lira has settled around 4 to the euro with the capital account in 1 percent of GDP surplus, but the current account gap persists around 4 percent despite export surges by global champions like white goods maker Arcelik. Errors and omissions almost equaled the financial inflow size in the balance of payments as money escape also strikes a blow.

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Central Europe’s Bypassed Boorish Behavior

2017 July 14 by

Central Europe stock markets, with Poland’s 32 percent gain the core universe leader, were strong through the first half as planned IPOs neutralized backlash against political heavy-handedness unsettling investors and drawing EU condemnation. GDP growth numbers at 4-5 percent were also solid, with low interest rates and inflation as the Czech central bank removed the currency peg and appreciation continued. Hungary’s climb was half Warsaw’s, although it outperforms on a one-year scorecard, as EUR 6 billion in annual public investment aid from Brussels may be in jeopardy on Prime Minister Orban’s hard-line stance against democracy activists and refugees, culminating in a recent campaign to shutter the Central European University founded by  Hungarian-American civil society and immigration benefactor Soros. Czech consumption was up a modest 2 percent in Q1, as inflation also hit that target to lift the koruna cap in place long after the Swiss central bank ended its intervention. Elections are due again in October, but may come earlier after the prime minister resigned and then retracted the move over his rivalry with business magnate and Finance Minister Babis, whom he accuses of tax violations. The President has refused to take sides in the fight, but Babis stepped down to prepare to lead his party, which has a double-digit margin in opinion surveys, in the upcoming polls.

Hungary’s monetary stance remains ultra-loose, with the central bank offering direct on-lending to sustain manufacturing as the PMI peaked at over 60 in May. Big freight firm Waberer’s is set for a record listing as a private equity exit with expected EUR 500 million capitalization. Its network straddles Western Europe and Germany in particular, and the deal would be a breakthrough in small and midsize firm support promised under official bourse takeover from the Vienna Exchange in 2015. Since then five companies were delisted, and private pension fund absence after seizure has deterred foreign participation. EU human rights spats have raised flags and the latest alleged breach of open education practice, along with corruption investigations into misused subway and other project funds, may heighten the stakes as the ruling party’s membership in the European parliament may be stripped as punishment. In Poland the “illiberal” camp is likewise in full swing with court and army appointments carefully controlled by the Law and Justice Party in power. Judicial independence would be at risk with new legislation which was criticized by security watchdogs for “undermining rule of law.” The military reshuffle in turn may endanger NATO equipment upgrade and spending commitments at a time the US administration has focused on these European ally shortfalls. Domestic demand is the main economic driver, but workers returning from London upon Brexit will dampen the outlook and add to high unemployment. Foreign buyers continue to own one-third of local debt, but the base has diversified to Asia and the Middle East and a “green bond” yield curve will be built as another innovation. However dedicated clean energy funds shunned Poland’s debut issue in view if its core coal industry, and pricing has otherwise been rich with the run-ups in JP Morgan’s benchmark domestic and external bond gauges through mid-year dirtying allocation.

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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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