Central Europe’s Rapt Resigned Fate

Central European bourses were split in Q1, with core members Hungary and Poland down double-digits while Bulgaria and Romania had strong frontier showings. Budapest was transfixed by central bank moves following top economic adviser Matolcsy’s takeover as he purged senior staff prompting the resignation of the deputy governor just before her term ended. S&P shifted the outlook to negative as he assumed the post and pledged to uphold “conventional” monetary policy resulting in an interest rate cut to escape recession. However he also introduced a multi-billion dollar discount lending and foreign exchange conversion scheme to aid small business which has a 25 percent NPL ratio and readily tapped Swiss franc and euro facilities during the pre-2008 heyday. It has since been shunned by banks already under fire from heavy taxes and the prime minister’s stated desire to achieve local majority ownership with rumors of threatened nationalization entering next year’s election cycle. The dominant domestic player OTP, a major share listing, reported profits only due to subsidiary performance in Russia and Serbia. The new financial transaction levy has only brought in half the revenue estimated on lower activity and Italian cross-border groups have expressed pessimism over future presence with one chief executive describing operations as a “nightmare.” The budget deficit should come in under the 3 percent of GDP needed to avoid EU fund suspension and international investors remain content to keep their 40 percent stake in Treasury bonds given the low yields or crisis odds in the adjoining Eurozone. The IMF recently warned that “fickle” market sentiment could turn to outflows and spark forint depreciation and instability, but with program negotiations abandoned the message got little attention. Poland on the other hand reaffirmed its intent to engage with the region more deeply by joining the euro, provided the usual 2-year “waiting room” period is waived to deter zloty speculation. The currency has weakened on central bank easing to lift anemic 1 percent-range GDP growth in line with the rest of Europe’s slump. The Warsaw exchange after years of battling for area supremacy is in talks with Vienna on a tie-up as bank and privatization sales have so far met with lukewarm response. Private pension funds may be directed more toward equities should the government follow through with a proposal to take Treasury bonds for budget deficit reduction.

Romania managed an almost 10 percent gain for the quarter as it tried to fulfill remaining conditions on its extended Fund precautionary arrangement with divestiture of a state railway despite implication in Cyprus’ bank seizures and capital controls. Tens of thousands of workers relocated there and shuttered Bank of Cyprus had a local affiliate. Bulgaria was ahead 20 percent on the MSCI index although the May presidential election is a tossup and the shelving of Greece’s leading banks’ merger could resign the ailing system to further damage.