Turkey’s No Good Cresting Credit Craze

2018 February 17 by

Turkish stocks were pressed to sustain their 2017 35% MSCI gain as political opposition to President Erdogan further solidified with a successful gathering organized by the new Iyi (good) party founded by a former interior minister expelled from the ruling AKP, and the central bank hoisted rates 50 basis points to stem near 15% inflation from the state-credit turbocharged economy expanding 7% in the third quarter. Investors were also spooked by a senior Halkbank executive New York conviction in an illegal gold for oil trading scheme with Iran violating sanctions, which may result in SWIFT network dollar-clearing curbs. Iyi’s head Aksener fashioned a conservative cultural anti-terror platform which promotes women’s rights and criticizes the presidency’s unchecked powers. Over 50,000 have been jailed and hundreds of thousands of government employees were removed under broad security authority after the botched putsch, and waves of educated professionals otherwise fled abroad. The US has been accused of aiding plotters and of encouraging a Kurdish stronghold along the Syrian border, while Turkish embassy personnel were accused of beating protesters in Washington during a bilateral summit. Visa services were suspended between the two countries in the aftermath, and overtures to Russia and China have increased on commercial and military cooperation. Western human rights groups have blasted the regime’s strong arm tactics, including confiscation of leading private company assets, as well as harsh refugee treatment despite hosting over 3 million escaping Syrians. With emergency law tourism is down despite the softer lira toward 3/dollar, and the current account deficit again approaches 5% with booming domestic demand, on household spending up 12% annually. Turkish business has borrowed $215 billion overseas, and the government will keep weaker firms from assuming more debt under recent changes. Banks likewise depend on foreign lines, and their position may be more precarious with global monetary tightening and lingering exposure from the guarantee fund push.

Refugee labor market practice was condemned in a December report by advocacy organization Refugees International calling for “sustainable solutions” after seven years of Syria’s civil war. Despite government and EU assistance the population must “fend for itself,” and can only find informal economy work with substandard wages and conditions with few permits issued under a 2016 program. Over 5000 Syrian-owned businesses have opened, but employees otherwise face prohibitive administration and fees. One million are in Istanbul, and over 90% are in urban centers with limited language and skills access. They are under “temporary protection” and must live in the city where registered and wait six months to apply for work approvals, now at 15000 total since introduction. Cash transfers are minimal for family support, and households typically must also send money to relatives in Syria. An estimated 80% of refugees are in the underground sector, and 40% of children are out of school in such labor, particularly in the low salary textile industry. The survey documented scarce permit information through community centers and employer hiring appetite with the minimum wage, social security and other charges attached. Few refugees speak Turkish and they encounter long delays in obtaining ID cards prior to seeking permits as well as discrimination in renting which can literally undermine prospects for roofs over their heads, according to the analysis.


































Russia’s Banking Blockade Blowback

2017 December 25 by

Russian shares tried to finish the year positive, as President Putin signaled his reelection run amid swirling allegations of manipulation and back-channel deals during the 2016 US polls and Trump transition aftermath. Former national security adviser Flynn joined other junior and senior campaign officials in facing prison time on criminal charges, with his perjury guilty plea focusing on diplomatic contacts before the administration took office where 2014 sanctions modification may have been explored. The President’s son-in-law in turn is reportedly under investigation for private and early government interactions with top executives of Russian state VTB, a main target of the original bilateral business ban which was reinforced this year with further legislation widening the potential scope against individuals and institutions particularly in the energy and financial sectors. The new reach could include all sovereign debt allocation to be considered in a Treasury Department study, as the foreign investment share in ruble paper stands at one-fifth the total. A pullback would raise pressure on domestic banks to fill the gap after the collapse of two major private competitors, and as they are already over-exposed to corporate borrowers with the twenty biggest accounting for 225% of common equity according to a December report by rater S&P. Concentration risk may be understated as it is “not fully captured” in current reporting which may flout single customer limits and not combine bond investment and credit lines. Large companies have also transferred cash from foreign to local banks, and do not disclose the holdings. From 2014-16 the overreliance intensified with the system’s high interest costs and low profitability aggravated by the oil price crash. Sanctioned Sberbank, VTB, Rosselkhozbank and Gazprombank hold half of the load on their books, without incorporating ruble and Eurobond allocation. For individual clients the ceiling under IFRS standards is put at $40 billion, and Rosneft had $25 billion in outstanding credit alone in the September quarter, the ratings firm noted. The recent failures of Okritie Bank and cohorts, following the central bank’s withdrawal of 250 other licenses, accelerated retail depositor flight to quality and size which injected funds, but companies could further experience losses in smaller intermediaries only partially covered by insurance.

While both leading state banks and corporates have pared foreign debt by necessity over the sanctions period, they owe $100 billion in interest and principal payment in 2018. The amount is manageable but may require deposit drawdown at home and abroad, especially if refinancing channels are constrained by fresh US and ally curbs. To prepare capital spending has been cut on major projects with the exception of a few high-profile hydrocarbons and railway deals. The government has indicated it will be selective in future equity participation, and has ruled out sizable privatizations in strategic enterprises while demanding increased dividends. The top three state banks do not need near-term Western capital market access, but their retail deposit growth will slow and the central bank’s foreign exchange support program dating from the 2015 crisis is winding down. The “specially designated” bank pariah list could also be expanded and secondary penalties applied against other countries under the “Countering America’s Adversaries” law aligning Washington’s political parties on an anti-Putin platform, the review concludes.


The Balkans’ Lingering Reconciliation Trials

2017 December 11 by

As notorious war criminal Mladic was found guilty on almost all counts and sentenced to life for his ethnic extermination campaign during the 1990s, Serbia and Croatia continue to struggle with post-independence legacies of heavy state ownership and political infighting but insist they have opened fresh economic policy and EU convergence chapters to enter the foreign investor mainstream. In Belgrade, which was bombed by Western coalition forces due to Mladic’s actions, the ruling SNS party led by President Vucic, with a technocrat government and a declared lesbian prime minister, remains popular although it is behind in surveys for the mayor’s race in the capital which may be scheduled simultaneously with parliamentary elections. The IMF program is on track with a 1 percent fiscal surplus set this year although civil servant wages and infrastructure spending will rise in 2018. The central bank is on hold with dinar stability around 125/euro and may hike rates soon reflecting global trends. Growth should pick up from the current 2 percent on further consumption and export recovery and FDI drawn in part from privatization sales. The 3 percent pace in Croatia is slightly higher aided by a tourism boom, with international visitors up 12 percent on an annual basis. The sector provides one-tenth of employment and has diverted arrivals from less secure Southern Europe and North Africa competitors. The collapse of retail conglomerate Agrokor, now under officially-directed restructuring, dampened consumption but EU cohesion funds helped fill the gap. The budget shortfall will be under 1 percent allowing exit from Brussels’ excess deficit procedure, but public debt is 80 percent of GDP and unions expect a 15 percent salary increase. A cabinet reshuffle kept the ruling HDDZ party in charge with a slim majority after the junior partner was ousted, but new elections could be called especially if the Agrokor workout stumbles.

Bulgaria assumes the EU presidency in 2018 after completing a major motorway as an aid recipient as it continues with low absorption and anti-corruption marks. A fiscal deficit is expected on higher pension and social security outlays, without intent to tap sovereign debt markets for financing. The currency board remains sacrosanct and property markets have bounced off the bottom again interesting foreign buyers and tenants. Romania’s breakneck 7 percent expansion has provoked warnings about consumption-driven stimulus, with the 3 percent-plus fiscal hole due to trigger European Commission monitoring. The current account balance has also worsened, and the central bank tweaked the interest rate corridor after 5 percent inflation, and may proceed with benchmark hikes into next year especially if political risks persist. The ruling party head has again been indicted for fraud, and his moves to drop the case through legislative maneuvers invited large street protests. A search for scapegoats has stirred nationalist anti-immigrant sentiment observers fear may drift toward levels in Hungary and Poland. In the former billionaire Soros fired back on the “lie campaign” mounted by the Orban government, and in the latter a “pure Polish blood” march organized with Law and Justice Party backing drew international condemnation for World War II era references. However their stock markets were up over 35 percent into November, with monetary accommodation and solid West Europe export demand redressing the outcry.


Europe’s Strange State Enterprise Striations

2017 November 22 by

An IMF working paper divides state-owned firms into the “good, bad and ugly” in a dozen European countries with financial, operating and governance indicators benchmarked  against Sweden in an attempt to assess the legacy of “inconsistent privatization” often leaving heavy debt and poor productivity. Efficiency and profitability lag private competitors, particularly in Southeast Europe and the Baltics. Slovenia, Lithuania and Latvia bolstered oversight but Bulgaria is behind on centralizing ownership rather than putting ministries in charge, clarifying dividend policies and professionalizing boards. Over 6000 companies are tracked across eight industries, dominated by health care and utilities. They contribute 1-10 percent of GDP and employment, with differences in the two readings reflecting relative capital and labor intensity. Energy sector output is over half government-controlled in Hungary and Poland, while mining is a main category in Estonia and Sweden. Losses are concentrated in several lines, including electricity in Bulgaria, transport in Croatia, and banking in Latvia. In Sweden by comparison large profits come from gaming and real estate. Debt in a handful of countries stands at 5-7 percent of GDP, and Bulgaria, Romania and Poland are at the bottom in return on equity. Extrapolating from the World Economic Forum’s infrastructure scores, the Baltics provide superior company quality to the Czech Republic and Slovakia. Firm-level difficulties pose macro fiscal and financial stability risks, with high contingent liabilities in Sweden and Slovenia’s two-thirds state-directed banks sparking a crisis five years ago that almost required Brussels rescue. Productivity tends to suffer unless foreign investors are also active, and the record is uneven on following core OECD corporate governance rules, with political interference worst in Bulgaria and Lithuania. EBRD transition measures likewise show gaps on hard budget limits, bankruptcy law enforcement and competition. Ownership guidelines are inconsistent and overlap with policy responsibility, and board member nomination and compensation procedures are opaque and not skills-based. The review urges comprehensive reform with the understanding that even healthy legal regimes fail on implementation.

Europe and Central Asia were again standouts in the World Bank’s latest Doing Business survey with 80 percent of economies taking strides in the dozen areas tracked, and Macedonia and Georgia in the top 20 of 190 nations, with both leading regulation revamp since publication launch fifteen years ago. Latvia and Lithuania are close behind with bankruptcy and tax shifts evaluated by tens of thousands of ground-level professionals as the raw study input. The European Union has commissioned its own sub-national work already profiling the Balkans, and Central Asia members Azerbaijan and Uzbekistan led the reform pack the past year. Kosovo also completed insolvency overhaul, and Belarus and Mongolia passed movable property laws to widen credit access. On minority shareholder rights, Kazakhstan mandated independent directors and an audit committee, and Georgia eased liability lawsuits. Loan reporting was strengthened in Slovenia, but business startup remains the signature catalyst in the region and globally with 2017 steps in the Czech Republic, Serbia and Tajikistan, although it was not highlighted in its maiden external bond prospectus which focused on dam construction for hydropower projects involving other key enterprise pillars on elusive electricity and permits.



Russia’s Revolutionary Sentiment Turn

2017 November 10 by

On the centenary of the Bolshevik revolution overthrowing the czars Russian stocks stayed down less than 5% on the MSCI Index as global emerging market funds shifted to overweight positions surpassing other BRICS, according to industry trackers. The inroad is chiefly at India’s expense where price-earnings ratios are double in the twenty times range, and reflect oil prices again drifting toward $60/barrel and central bank easing to lift predicted 2 percent growth ahead of elections next year. Safe haven state bank inflows also contribute as the central bank shutters big private lenders on capital and accounting deficiencies. At the annual IMF-World bank meetings officials also emphasized fiscal consolidation under primary deficit elimination set for 2019 without tax hikes and relying on better centralized collection and management. A big IPO went ahead from controversial entrepreneur Deripaska caught up in the investigations intrigue over the 2016 US presidential election as a longtime client of campaign manager Manafort, who was the first indictment by special counsel Mueller for alleged money laundering and conspiracy. Oil giant Lukoil has been prominent in extending existing bilateral sanctions for a planned decade under the suspicion around the Trump administration, which prompted Congress to tie its hands while expanding the government individual and company blacklist. Sovereign debt investment could soon be banned as well after a Treasury Department report is completed, and could target local currency participation back at one-fifth the total for foreign buyers on renewed ruble embrace. Moscow has moved away from traditional energy ties with giants like Exxon Mobil to forge ventures with China, Saudi Arabia and Venezuela, where it has secured access to rich fields in return for liquidity injections to avoid default. Long-term credit default swaps assign almost a 100 percent chance of non-payment, as new debt purchase there has been barred by Washington pending free elections in contrast with recent governor races widely seen as rigged. Russia’s version of “managed democracy” is likewise under the microscope, with President Putin yet to declare re-election intentions as another opposition candidate, former talk show host Sobchak, entered the contest alongside jailed activist Navalny. Her father was mayor of St. Petersburg and Putin’s original mentor, but the campaign platform may be thin on substance and particularly the economy and she risks cannibalizing the anti-incumbent vote. Putin has now been in power close to twenty years but has not marked the occasion with public notice since it may draw uncomfortable references to the anniversary of the czarist demise.

The international impasse over Eastern Ukraine has not budged, with thousands of displaced residents preparing again for the harsh winter. Officials proclaimed successful external bond market re-entry and compliance with IMF program conditions on the budget deficit, bank cleanup and gas subsidies as growth turned positive aided by metal export price rebound. Infrastructure in the undamaged heartland is a big push through a dedicated road fund and port rehabilitation, but corruption remains a sore spot, with President Poroshenko’s popular approval in the basement for identified conflicts and cronyism and former integrity honcho Saakashvili leading street protests against him. Agriculture reform and capital controls relaxation are stuck on the agenda pending revolutionary breakthroughs unlikely from discredited and exhausted administration forces, according to political observers.


The Czech Republic’s Missing Mate Mooring

2017 November 3 by

Czech Republic stocks, after a 20 percent MSCI index advance through September, rocketed on the sweeping election win of former Finance Minister Babis, a wealthy business executive, who formed the new Ano (Yes) party in a clear break from years of traditional political group coalition reshuffling. His platform was pro-business and Europe but otherwise vague, as the campaign was shadowed by allegations of inordinate tax break claims and other questionable transactions. He resigned from the last government to protest his innocence, and if other parties are invited to join the administration representatives will likely be drawn from a fresh pool to leave behind the outgoing prime minister and peers as adversaries. Babis took a similar anti-immigration populist stand as in neighbors Hungary and Poland but has otherwise talked of running the country in more company-like fashion to regain the bellwether competitive position of the early post-communist transition. Local brokers argue another wave of state enterprise privatization and big IPOs could be forthcoming, and that unlike the rest of Central Europe where private pensions are under threat or been dismantled, these schemes could be strengthened with overdue social security reform. These ambitions may be misplaced but exchange rate and monetary policies recently generated excitement, as the longtime koruna-euro ceiling was removed and a first interest rate hike accompanied an above target inflation rise to 2.5 percent. Hungary in contrast has continued to ease in unconventional fashion through loan facilities and long-term yield curve reduction, with inflation still under 2 percent. Despite leadership spats with Brussels, EU cohesion funds pour in and contribute to a 5 percent of GDP external surplus. Prime Minister Orban has ignored a European Court of Justice ruling that 2015 refugee quotas organized by Germany should be honored, and pointed to Chancellor Merkel’s setback in recent elections as vindication of his position. Inflation is also below-target in Poland with the central bank on hold, as court interference proposals which drew international condemnation were diluted and fiscal discipline honored despite increased social spending to keep Law and Justice party campaign promises. Consumption has maintained 4 percent GDP growth, aided by emigrant return from the UK post-Brexit which has kept downward wage pressure as compared with Romania, where large civil servant salary jumps have concerned the IMF under a monitoring program. The budget giveaway prompted the central bank to shrink the interest rate corridor in response as monetary policy tries to fight back.

Investors worry the Balkans pattern of public sector imbalance could be repeated as in Croatia struggling to preserve its credit rating with a 1 percent of GDP deficit, and in Serbia where a Fund arrangement in place will produce a small surplus with moves like airport divestiture and tax system revamp. Meanwhile in Greece fiscal consolidation has outperformed on 2 percent growth and bolstered the EU austerity camp view that a 3.5 percent primary surplus can be met over the medium term. The IMF continues to cooperate but presumes future additional debt relief as the latest deal ends in less than a year. The remaining banks with 40 percent bad loans have ignored the debate and begun to return to global bond markets for recapitalization capitalizing on an historic buying frenzy.


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.


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.


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.


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.