Bank Conditions’ Crude Unrelenting Cry
The IIF’s Q1 bank officer sentiment index drawn from 150 responses showed another point and a half drop to 48 as demand and supply deteriorated in Europe and Latin America in particular, and trade finance became more difficult. Consumer and housing loans were off on tighter global standards despite stability in external funding as NPL levels are due to rise, although Central Europe suffered from geopolitical jitters affecting company lines as well despite investment recovery. Asia was battered by high personal debt levels while the Middle East and Africa were not as damaged given their lower credit bases. However these two regions depend on cross-border export facilities that have become scarcer and more costly without the domestic backstops available elsewhere and they may have to tap outside official help to relieve a persistent crunch. In the Vienna Initiative countries figures from 2013’s last quarter reflected sizable reductions to Bulgaria, Hungary and Slovenia as well as Russia before the onset of the Ukraine crisis. The area’s average loan-deposit ratio was down to 110 percent as consumers deleveraged since 2008, but face a new budget and inflation threat with the potential cutoff of Russian energy, although Poland and Slovakia have reserve stockpiles and other neighbors can access alternatives. Eurozone peripheral members could likewise face renewed pressure on this front causing another accumulation of ECB Target 2 imbalances which improved 50 percent under IMF-EU adjustment programs in the final stages. Greece and Portugal now run prudent budgets and current account surpluses and have successfully returned to commercial bond markets without seeking additional bilateral or multilateral support. Hungary’s central bank has tightened foreign exchange exposure limits and ended overseas holding of the two-week Treasury bill in an effort to re-establish domestic lender dominance following the path charted in the Orban administration’s first term. Fitch Ratings assigned a stable outlook for Slovenia despite likely reshuffling of the top political leadership as bad assets were transferred to a central management agency and all 2014 external debt needs were met at low yields. The economy remains in recession and pension reform and privatization are erratic but talk of emergency rescue which crested post-Cyprus has quieted. Even with capital controls still in place the island has resumed voluntary private bond placement with a 6-year 6.5 percent London Stock Exchange listing.
The hard currency EMBI and CEMBI benchmarks have outperformed as retail fund inflows resume according to EPFR and monthly positive portfolio inflows are heavily weighted to bonds as calculated by the IIF’s 30-country tracker. Through April sovereigns have raised $50 billion and corporates $125 billion about half the full-year forecasts by major houses notwithstanding the disappearance of Russian borrowers shunned by creeping sanctions. Investment-grade governments like Romania and Turkey were oversubscribed and junk paper from Pakistan, Sri Lanka, Lebanon and Zambia also recently mixed in the contrasting immutable mania.
