Central Europe’s Easy Ride Riddle

Stock markets in Hungary and Poland were up 20 percent through Q3 on the MSCI index on anticipated easing of the Eurozone debt crisis with the ECB offering conditional further support and monetary policy shifts toward resuscitating flat growth. Hungary’s central bank defied currency risk with a 25 basis point slash to combat recession as well as fiscal deficit target overshooting, as another round of IMF loan negotiations was postponed until after the mid-October annual meeting and Budapest formally responds to a letter listing outstanding issues. On higher taxes inflation has crept to 5 percent and business sentiment is at a 3-year low. The European Commission dispute over withheld cohesion funds could be revisited with official and private forecasts for budget gaps above the 3 percent of GDP Maastricht target through next year. Critics have also begun to charge official laxity through the “quantitative easing” program extending 2-year facilities for corporate borrowing which continues to slide. The Orban government’s approval reading is at 15 percent, and he insists that special levies be maintained on foreign-owned banks and industries rather than taking revenue from households and individuals. In a spat with fund giant Templeton, which is a large holder of local Treasury bills with 3-month yields at 6.5 percent, collectors have demanded back dividend taxes, and an Asian outsourcing contractor was the latest to introduce job cuts amid the difficult cost climate. The Polish central bank stayed on hold at the October meeting despite a GDP growth downgrade to 2 percent, and a push for bigger listed state company dividends, including from insurer PZU and copper miner KGHM, to keep public debt below the constitutional limit even though needs have been pre-financed through the beginning of 2013. After defaulting on $2.5 billion in debt construction firm Polimex won a large bid which could facilitate restructuring over the coming months, although the broader PMI is at meager 47. Prime Minister Tusk has promised to unveil a fresh reform package to mark his second term and to clarify euro entry intentions which had originally assumed a mid-decade timetable.

The Czech Republic was flat at the rear of the core trio as the ruling coalition split on fiscal austerity moves again hung in the balance after another no-confidence vote. It was first in the group clearly in recession, and export recovery remains hampered by koruna strength against the single currency. In contrast the neighboring Romanian exchange which was ahead 4 percent at end-quarter has experience unrelenting leu pressure as elections are scheduled once more after an aborted constitutional referendum and the EU-IMF backstop may be tapped in the interim. Recent missions have granted decent marks but growth is at a standstill and an attempted chemical company privatization was again challenged for lack of ease and transparency.