Europe’s Disturbed Deleverage Design
Central Europe stock markets searched for direction despite a regional safe haven switch following China’s devaluation, as the Vienna Forum hailed early year bank deleveraging and capital outflow moderation in its periodic public-private sector monitor. The publication reported that the average loan-deposit ratio remained 110 percent but annual credit growth was down to single digits on both demand and supply changes. The IIF’s latest survey of bank lending conditions showed Q2 improvement but the index is still stuck under 50. Household borrowing has retrenched for hard and local currency mortgages alike and corporations are working off previous debt overhangs amid tepid economic recovery with Eurozone expansion at just over 1 percent this year. Hungary’s 20-percent gain as the exception began to flag in July with undecided voters now greater than support for the main political parties, with Prime Minister Orban’s ruling Fidesz pulling in 38 percent, 10 points ahead of the right-wing anti-immigrant Jobbik. The refugee influx from Africa and the Middle East through the Balkans has become a pressing issue with authorities planning to build a border wall. GDP growth has slowed to 2.5 percent and the central bank has signaled the end of interest rate easing in 10-15 basis point increments with the 1 percent bound approaching. June inflation was 0.5 percent as deflation may be decisively banished and the 3 percent target may be hit by year-end. The currency is around 310/euro and local bond yields have crept up as the 2.5 percent of GDP budget deficit aim may prove elusive with recent bank tax modifications. The current account surplus has held at 5 percent of output and the Prime Minister may be hedging export bets by cultivating ties with Moscow despite EU sanctions, including renewed energy cooperation.
Poland has suffered as the liquid currency proxy for the area as the opposition Law and Justice Party extends its lead for October parliamentary elections. Voter intent to punish the long-dominant Civic Platform was reinforced by former prime minister Tusk’s facilitation of a third Greek EU rescue deal in contrast with the rapid shock therapy Warsaw endured in the 1990s, as the legislative challengers claim the nationalist mantle. Incumbents may try to regain popularity with a mandatory plan for Swiss franc mortgage conversion in contrast with the previous voluntary stance, but such steps are likely too late to reverse the fall poll outcome. Investors worry about overspending and further state takeover of private pensions, and a more confrontational foreign policy toward Brussels and NATO as Ukraine teeters next door. Romania has been up on the MSCI Frontier index as another outlier, but an anti-corruption crusade including the indictment of former prime ministers seems to have pre-empted tax reforms demanded by the IMF to resume a backstop program. The chief prosecutor, a former basketball star, has notched 1000 convictions redeeming the cleanup pledges of ethnic German President Iohannis. Although the Greek crisis has not infected local subsidiaries, private sector credit is flat with banks’ NPL ratio at 15 percent. The currency is steady at 4.4/euro but previous over-weights have been purged as a skeptical crusade again gathers pace.
