Europe’s Original Rescue Return Reticence

After years under official IMF and Euro-zone lifelines Iceland, Latvia and Romania returned to external bond markets almost the same week in well-subscribed efforts despite lingering doubts about output and banking sector recovery and currency and structural reform paths. The first two countries are in battles with creditors over bank resolution, with the Icesave UK and Dutch depositor claims now referred to the European Court of Justice after reimbursement was again rejected in a national referendum, and Latvia’s Parex has been challenged by foreign hedge funds over minority shareholder rights. Capital controls remain in place to prevent a run on the krona, while the lat peg has stayed intact without an updated timetable for joining Baltic neighbor Estonia in outright euro membership. Romania’s leu has strengthened as the current account deficit will slim to 4.5 percent of GDP after years in double-digits and a successor Fund/EU standby facility was agreed. Bucharest and the tiny Sofia stock exchange next-door with 25 percent gains continue to lead the frontier Europe pack despite jitters over the fate of Greek-owned local financial groups. Bulgaria is on track for 3 percent GDP growth as the unpopular government faces another parliamentary confidence vote on a fiscal squeeze to safeguard the currency board and avoid resort to outside international help. The central bank reported accelerated capital outflows in Q1, and although exports and FDI have progressed a property overhang weighs on business and consumer sentiment. The main ethnic Turk political party has been critical of tight-fisted policies and anti-corruption strides and draws a contrast with the middle-class economic success of Turkey proper, where the Islamic-oriented AKP just won another mandate after a decade in power short of the majority to unilaterally change the constitution.

Its stated commitment to fiscal-monetary and religious moderation is regularly cited by foreign investors, who await a similar signal in Egypt during a precarious transition. The stock market there is stuck at a 25 percent decline despite multi-billion dollar pledges by the Bretton Woods institutions and Arab and African sources to cover budget and balance of payments deficits this year. Inflation is at 12 percent as Treasury bond yields hover at the same level on lackluster auctions exclusively relying on domestic banks. Many listed companies are under investigation for previous regime ties and are also suffering earnings setbacks from travails elsewhere in the MENA region. Corporate and personal accounts have reportedly been shifted to Dubai institutions as the city-state plans again to tap voluntary bond markets as well when reflexes are temporarily nimble.