Tim Gosling in Prague -

Central European markets remained relatively calm on July 6 following the Greek referendum rejecting the latest proposals from its creditors on a debt rescue. While the zloty and forint have weakened, and bond yields in much of the region have risen, Czech assets have benefited as investors treat them as a haven from the fears of a Grexit.

The immediate risk of contagion for Central Europe and the Baltics from a Greek withdrawal from the Eurozone is seen as low. However, the rising risk to the Eurozone will inevitably put pressure on regional economies, bonds and currencies.

As in the wake of the surprise move by Athens to call the referendum in late June, the strong "no" vote by Greeks has put pressure on all types of assets, amid fears that Greek Prime Minister Alexis Tsipras will not be able to reach a deal with creditors. 

That has investors looking to reduce risk positions, and some assets in the Eurozone periphery - for instance Portuguese bonds - experienced a poor reaction. However, overall the market reaction remains subdued, as investors wait to see what will happen next. 

"The muted reaction in financial markets in Central and Eastern Europe (CEE) to yesterday's No vote in Greece suggests that contagion to the region has, so far at least, been relatively well contained," writes William Jackson at Capital Economics.

Muted

Regional currencies - the Polish zloty and Hungarian forint in particular - are seen on the frontline. UBS said in a note in late June that the forint - exposed via Hungary's relatively large state debt of around 77% of GDP - could suffer a 5-10% depreciation against the euro in the event of a Grexit. That implies a downside of 15-20% against the dollar.

Indeed, even though the euro dropped 0.5% against other major currencies, the forint eased to a six-month low against the common currency. The Hungarian currency peaked at HUF317/€ in morning trade before settling around 0.4% down at HUF315.649.

The zloty also suffered, but not to the same extent thanks to Warsaw's stronger fiscal position. The Polish currency has also benefited from repeated pledges from the government and central bank that they stand ready to intervene in the case of any "temporary" pressure.

The zloty fell around 0.2% to 4.204 against the euro by the close, having touched its weakest level since February earlier in the day. Poland's WIG index finished the day just 0.33% down. 

"The referendum itself does not have to be such a key issue," Poland's Finance Minister Mateusz Szczurek said on public radio on the morning of July 6. "The first [market] reaction does not seem significant."

While its neighbours are vulnerable, however, the Czech Republic's role as a haven is being bolstered by the Greek crisis. Societe Generale noted recently that while Hungarian and Polish bonds show a strong correlation with movements in yields of bonds from the Eurozone periphery, Czech bonds are more closely linked to German issues. 

The currency performed a similar trick in early trade, surging strongly towards the central bank's cap of CZK27 to the euro, before dropping off to finish the day at CZK27.172. The Czech National Bank was even moved to reiterate that it "remains committed" to the currency limit, with some analysts suggesting it may need to move from its favoured tactic of verbal intervention to actually commit funds to the market.

Insulated

On a wider scale too, there is clear confidence for the time being that the fallout will remain limited. The relatively small size of Greece in the Eurozone, and its limited banking links should insulate much of the bloc. On top of that, the market confidently expects the European Central Bank to act.

"ECB QE and other measures should limit contagion," hopes Demetrios Efstathiou of Standard Bank. "Highly importantly, [ECB President Mario] Draghi enjoys the confidence of the markets."

Indeed, the ECB's programme of money-printing, or quantitative easing (QE), is seen as the ultimate guarantee that the fallout of any Grexit would be limited on the rest of the Eurozone, and thereafter on Central Europe and the Baltics, whose economies are so heavily reliant on the single currency area for export demand. 

Near term, the economic risks are small if not insignificant. Central Europe is heavily insulated by its lack of links to troubled Greece. "Exports to Greece are negligible, ranging within 0.1-0.5% of GDP for CEE countries, and financial linkage to Greece is [close to] non-existent," Erste pointed out in late June. 

On top of that, having battled their way through the recent years of financial crisis, the CEE economies are in good shape to weather external financial shocks. "Current account deficits have been eliminated and fiscal deficits narrowed well below 3% of GDP," the analysts at the Austrian bank point out.

Fundamental shift?

That confidence in the short term has allowed Visegrad countries and the Baltic states the freedom to follow the stern stance of the Germans towards Athens. The Baltics, immensely proud of the tough austerity they implemented following economic meltdown in 2009, have been front and centre of the criticism. 

Greece has practically voted against international help, claimed Latvian Finance Minister Janis Reirs. No country has money to give to Athens for free, he added, according to Latvian TV. The only way out is now a Grexit, he insisted.

It's a view that echoed that of Slovak Finance Minister Peter Kazimir. "The nightmare of the 'euro-architects' that a country could leave the club seems like a realistic scenario after Greece voted 'No' today," he tweeted late on July 5.

Prime Minister Robert Fico backed him up, dismissing the effect of a Greek exit on his country. "Greece exiting the eurozone will not mean anything, Slovakia will not be harmed as a result," he said according to AFP.

Similar - although perhaps less trenchant - statements came from heads of state and government in Estonia, Lithuania and Poland. 

Yet at the finance ministry in Warsaw, Szczurek was more measured in his reaction, as he noted the deeper-lying issues surrounding confidence in the Eurozone. Brussel's inability to deal with the Greek crisis is an argument against Poland's entry to the Eurozone, he claimed.

That's a nod to the longer term risks for the region. Poland, and to an even greater extent the rest of Visegrad, would likely suffer a significant spillover should a Grexit actually play out because of their huge dependence on exports to the single currency area. While direct economic links are very limited, the crisis threatens to hit banks in the likes of Bulgaria hard, and shake confidence across the Eurozone, which has finally looked to be on a steady recovery path in recent months.

"For most CEE countries, the real risk lies in their large ties with the wider Eurozone," notes Jackson at Capital Economics. "Accordingly, what matters is the extent to which the Greek crisis triggers stress in financial markets in Western Europe."

Others see an even more far reaching effect. At Commerzbank, analysts suggest, Grexit or not,  the debacle has already changed things fundamentally in the region compared with the optimism seen a decade or so ago.

"That hope has been dealt a blow in two ways," they write, pointing to the Greek saga in combination with the EU's failure to solve the crisis in Ukraine. 

"The whole development must result in a major re-think for CEE politicians (as we may see reflected in the Polish October elections)," they suggest. "Core Eurozone countries had been promoting political union through the single currency, and, while we may be seeing relatively muted initial market reaction, this first sign of 'failing' EU policy will send shock waves to a CEE that has been looking to the 'West' for support versus an ever-sterner Russia."