Central Europe’s Vacated Velvet Touch
As Velvet Revolution Czech icon and former President Havel was mourned, the economic growth forecast changed to flat this year after earlier optimism on the prolonged crisis in the Eurozone which takes 75 percent of exports. Gradual fiscal tightening, including a 5 percent VAT increase, has likewise cramped domestic demand as the government strives to shrink the deficit to the 3 percent EU standard on public debt at 40 percent of GDP. The currency which has long been an overweight trade has slipped against the euro, and depreciation is expected to continue with the central bank affirming a hands-off stance. It has kept rates on hold and in its latest statement hinted at easing when the exchange rate stabilizes. FDI is again predicted to cover half the current account gap and the banking system with a 75 percent loan-deposit ratio is seen as less prone to foreign squeamishness, but parties in the fragile coalition are calling for tougher protections and contingency measures. They distinguish potential steps from the harder line in next-door Hungary, where the stock market decline has been double Prague’s. In the latest boxing round with the Orban administration, the IMF suspended negotiations over a new facility as the ECB also lambasted monetary authority changes that erode independence and a fiscal rule that embedded a flat tax. The Prime Minister, after first dismissing their objections, proclaimed that international reserves could be used for 2012 repayments without outside help. According to a “burden-sharing” arrangement announced with banks on fixed forint- Swiss franc-denominated mortgage conversion, one-third of the funding for the scheme has drawn already on the pool with spare capacity, officials assert. The bank hits absorbed to date prompted further downgrades from ratings agencies that also challenge this year’s marginal growth, 4 percent inflation, and 2.5 percent of GDP budget deficit parameters. A plan to merge financial services regulators has further pitted the regime against the central bank, which recently lifted the benchmark rate 50 basis points to strengthen the forint.
Direct intervention as in Poland has been shunned to date, but political pressure could sway such practice even in the absence of a formal statute establishing the power balance. The re-elected Civic Platform leadership got a mixed sovereign rating mark as it was kept at the same level as Italy with the caveat that local and regional groupings without sufficient revenue would likely endure “negative actions.” It can tap a sizeable IMF pre-qualified contingency line, as Romania, whose currency has also slipped on the continent’s riptide, moved to accelerate installments under a smaller precautionary version to harden its armor.
