The EBRD’s Muddling Through Muddle

The EBRD tapped a UK civil servant for the helm in a break with two decades of European continent executive domination as it assumed a “muddling through” scenario of uneven single-currency crisis mitigation with 3 percent member country average GDP growth this year. The Southeast with direct trade and banking ties to Greece will be weakest, while commodity exporters in the CIS will see a 5 percent uptick. The Baltics beat Central Europe with Estonia a standout, while the newest Mediterranean adherents will again be clobbered by near-recessions. All transition economies are feeling the Eurozone debacle mainly through the current account with net FDI remaining positive with the exception of Russia. However cross-border bank deleveraging is “largely unabated” in its view and triggered real credit contraction in both the EU and Ukraine. Headline inflation remains a concern in Turkey in particular, and the region lags Latin America and Asia in fiscal prudence and reserve accumulation. In monetary policy the ECB will continue to be “supportive” although big bank insolvencies would test it under a “worsening situation.” The Middle East is experiencing its own political and geopolitical shocks which may indefinitely impede recovery and raise oil prices. The Central European Four have front-line Euro-crisis exposure despite Slovakia only fully in the zone in addition to its heavy auto industry dependence. Slovenia, where the stock market is off 10 percent, is another overlooked user with bank recapitalization, pension and competitiveness challenges which  aggravate the modest public debt load. The Czech Republic is in recession as the rotating government coalition tries to sustain fiscal reforms, and Poland’s central bank has raised rates and intervened on behalf of the zloty with a $30 billion IMF backup credit line awaiting activation. In Hungary, the negotiator for a Fund package was replaced with a confidant of the prime minister, who introduced a transaction tax to succeed the special bank levy in a further move delaying compromise.

With the leu at a record low and a caretaker administration in place for the next six months Romania may tap its standby funds and request an increment. It and Bulgaria have a large Greek bank presence as the ECB will no longer accept collateral from that group to access liquidity facilities. Scandinavian bank commitment to the Baltics has not prevented defaults and runs in Latvia and Lithuania. External bond markets have reopened for the two, but domestic demand still suffers from years of “internal devaluation” from austerity shifts. The EBRD points out that stability and exchange rate “normalization” has taken root in Belarus with Russian aid amid the surrounding turmoil after 5 percent growth last year. Nonetheless inflation is 30 percent and Western sanctions are in place against the authoritarian Lukashenko regime which has long been stuck in a singular muddle.