Emerging Europe weighs up Eurobonds vs IMF

By bne IntelliNews August 17, 2009

Nicholas Watson in Prague -

The reopening of the debt markets to Central and Eastern European issuers mean that some governments might avoid having to take International Monetary Fund money.

The two countries in the spotlight at the moment are Turkey and Lithuania, neither of which has so far been forced to go cap in hand to the IMF.

Turkey has been haggling with the IMF for what seems like an eternity over the terms and conditions of a new stand-by loan to replace the one that ran out over a year ago. Prime Minister Recep Tayyip Erdogan is playing hardball, refusing to cut expenditures to the degree the IMF wants, because he feels, probably correctly, that Turkey has weathered the crisis comparatively well and isn't in urgent need of the money. The latest "news" came on August 13 when the Fund's Turkey resident representative Hossein Samiei told Reuters TV rather noncommittally that the talks are proving productive with the objective of reaching a "resolution" and denied reports the IMF is demanding TRY50bn (€23.6bn) in additional fiscal measures from the government as the price of a new deal. "The government is still weighing up its options. Plan A is getting through the crisis without a new IMF arrangement, but if market sentiment turns negative, they will cut a deal with the IMF, ie. Plan B," says Tim Ash of Royal Bank of Scotland.

The prime minister has been emboldened by a recent rally on Turkish capital markets, reflecting the improving global sentiment and risk appetite, which in turn has prompted foreign investors to take a fresh look at Turkey. The risk of owning Turkey's bonds has fallen dramatically, with credit-default swaps (CDS), contracts that protect bondholders against the risk of default, tightening to 18-month lows. Analysts say Turkey is probably looking at doing one more Eurobond this year, possibly in September, following the high demand seen for the $1.25bn dollar-denominated Eurobond it issued on July 27 at a yield of 6.65%.

Lithuanian officials have also been saying that the government will only turn to the IMF if the debt markets close. "The country has to cope on its own, and only if international markets close for good or the situation gets critical, the country will address not only the IMF, but also the European Commission," the Baltic country's new president, Dalia Grybauskaite, told Lithuania state television on August 12.

Short of another blow to the global financial system, Lithuania should be able to continue borrowing, given the state successfully raised €500m in a Eurobond placement in June. After all, even Hungary, long considered the sickman of Central Europe, managed to successfully get away a €1bn issue in mid-July.

Russia is also expected to return to the international capital markets with $17.8bn worth of Eurobond issues in 2010 to fund a 7.5% deficit - its first sovereign issues in nearly a decade. Overall, Russia expects to borrow $20bn a year from the international markets between 2010 and 2012.

Also on the slate are countries like Romania, Bulgaria and Montenegro.

Balancing act

The ability of Central and Eastern European governments to tap the international debt markets over the next year is seen as crucial to finance the region's swelling budget deficits. Economists says GDP growth will continue to be anemic throughout 2010, with unemployment continuing to weigh on public expenditure at the same time as revenue from foreign direct investment stays weak.

Royal Bank of Scotland calculates that the CEE region, excluding Russia, will post an aggregate budget deficit of approximately 5.4% of GDP in 2010, flat on the level in 2009, but significantly above the 2% aggregate deficit recorded in 2008. This will result in a budget financing need for the region of around $170bn in 2010, which translates into an expected general government/sovereign debt issuance of over $100bn in 2010. "The sheer amount of new sovereign supply coming to market does still suggest some drag in terms of sovereign spreads, which will struggle to sustain pre-Lehman levels, eg. EMBI+ at 300 basis points and below," RBS' Ash says.

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