The Balkans’ Fumbled Fund Football

Balkan stocks languished in negative MSCI territory with complications in EU and IMF aid programs aggravated by political repositioning as Russian energy and export dependence also dampened economic prospects. In Romania Prime Minister Ponta got 40 percent in the first presidential round but opposition candidate Johannis was close at over 30 percent on an anti-corruption platform which ignores the Fund precautionary deal now on hold pending a new government and revenue to cover social security contribution cuts. GDP growth is under 2 percent on tight fiscal policy and lagging fixed investment due in part to the low use of EU cohesion funds. Industrial output continues to drop and local currency lending has slowed despite consecutive benchmark rate reductions due to last to just over 2 percent with minimal inflation. Bank reserve requirements have also been slashed to reflect ECB norms with euro entry targeted by end-decade. With S&P’s recent elevation all agencies assign a sovereign investment grade although the current account may shift to a slight deficit this year as FDI was stunted by privatization delays. Serbia held a London promotion for its proposed state divestitures including the Belgrade airport, as the IMF began a visit to resurrect a lapsed arrangement officials foresee by early 2015 after enacting wage and pension austerity. Recession was deepened by flooding which hit farm and coal production as Italy’s Fiat expanded its plant despite mixed car sales. The central bank has kept the main interest rate at 8.5 percent to break currency weakness as spillover from Croatia’s debt troubles also damages confidence. Deflation has taken root with economic contraction with external obligations over 100 percent of GDP. The fiscal deficit was raised to 5 percent of GDP with contingent liabilities from toll roads as the government tries to avoid Fund recourse. Bulgaria eyed another coalition between the GERB and Reformist Bloc as Prime Minister Borisov was returned to office, although elections could again be called if the agreement dissolves. After receiving a Brussels infusion for seized Corporate Commercial Bank an audit found a huge hole commending liquidation which would activate retail deposit insurance but leave external bonds in default. The budget gap will exceed the 3 percent recommended EU threshold and Greek banks exiting Troika oversight face additional capital-raising post-asset review which may involve further cross-border withdrawal.

Baltic share losses have been in double digits despite 2-3 percent economic growth and euro adoption for all three members set with Lithuania’s admission next year. Geopolitical aversion has settled in with the schizophrenic Russian relationship underscored by the continued strong showing of Latvia’s pro-Moscow party as diplomatic and trade ties sour. Lithuanian bonds were recently snapped up and Scandinavian bank domination in the area is still viewed as positive despite Sweden’s repudiation of pro-business parties and interest rate cuts, Finland’s loss of AAA rating, and Norway’s sovereign wealth fund redeployment in light of oil price and environmental patterns.