Greek tremors muted in Central Europe for now

By bne IntelliNews June 29, 2015

bne IntelliNews -


Markets across the globe have retreated on the back of the drama in Greece. Athens is set to miss a payment to the International Monetary Fund (IMF) on June 30, and has imposed capital controls for at least a week as it looks to ward off a potential bank collapse. 

The world now waits with baited breath to see if negotiators can halt an apparent slide towards a Greek exit from the Eurozone. The immediate risk of contagion for Central Europe and the Baltics from that unprecedented catastrophe is low, insist analysts and officials in the region. However, the rising risk to the Eurozone will inevitably put pressure on regional economies, bonds and currencies.

Polls in Greece suggest the July 5 referendum called by the government will see the country vote to remain in the Eurozone (not the question on the ballot, but clearly the real topic). However, uncertainty blights nearly every issue – the question to be asked, an offer from creditor countries that is about to be withdrawn – and that will batter confidence on the markets for as long as it lasts.

Seat belts tightened

“It is hard to forecast where CEE assets will be at the end of today or the end of this week,” write analysts at Erste Bank. “What seems sure is that markets in CEE can be in for a roller-coaster ride; seat belts should be fastened.”

With that in mind, markets will clearly be dominated by moves to reduce risk over the next few days. “However, investors might be cautious before trading on a Grexit and wait for further signals from the players involved,” suggests KBC.

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 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.

However, for the moment, wait-and-see looks to be the mantra for currencies. “After the shock of the weekend, so far, the markets are well behaved,” writes Demetrios Efstathiou at Standard Bank. “Encouragingly, markets have bounced back from lows but it is too early to say that the worst is over.” Following a sharp fall on opening, Central European currencies recovered to trade fairly flat on the morning of June 29. 

Yet the stress will remain while the bartering continues in Brussels. “Non-German core and semi-core bonds may show a modest spread widening,” according to KBC. “The euro and equities should be under pressure too, as well as all riskier assets.”

Societe Generale warned recently that 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 the German Bund, it added. Indeed, while Polish and Hungarian debt is under pressure – Hungary’s bonds in particular suffer from the country’s high level of debt – Czech yields even tightened slightly.

Fearing contagion from Greece, Spanish and Italian yields on 10-year bonds soared by around 35 basis points (bp) early on June 29 notes Market sources claimed to the news portal that yields on long Hungarian maturities rose 20-25bp in morning trade. However, following the sharp rise in yields on opening, investors calmed down through the morning.


There is clear confidence for the time being that the fallout should remain limited. “We don’t expect a repetition of the turmoil in 2010-2012/3,” the KBC analysts continue. “Contagion will be more limited, as Greece is small and not essential for the euro area and its debt is primarily held by official creditors. Risks for the banking sector are small.”

Emerging from the meetings in Brussels on June 28, Lithuanian Finance Minister Rimantas Sadzius told BNS that the “contagion effect” from Greece to other Eurozone members will be managed through “appropriate mechanisms”.

“ECB QE and other measures should limit contagion,” hopes 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 guarantor to limit the fallout for the rest of the Eurozone. That, then, is the longer-term point of concern in Central Europe and the Baltics, whose economies are so heavily reliant on the single currency area for export demand. ”What matters for most EMs is not so much the crisis in Greece itself, but whether this triggers contagion and large-scale financial dislocation in the wider euro-zone economy,” suggests Neil Shearing of Capital Economics.

Near term, the economic risks are small if not insignificant. The region 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 either non-existent,” points out Erste. 

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.

Optimistic noises

Politicians and other officials across the region are keen to agree with that optimistic outlook of course. 

Czech Prime Minister Bohuslav Sobotka said the government in Prague will meet to discuss the situation, but not until July 1. That’s despite criticizing Athen’s referendum as absurd and warning that a Grexit is becoming a reality. Lubomir Lizal from the Czech National Bank insisted the country’s lenders are resilient enough to withstand distant shocks such as the crisis in Greece, although he admitted indirect impact via the Eurozone is likely.

“Slovakia is in a secure position, there is no reason to be concerned,” claimed Slovak Minister of Foreign Affairs Miroslav Lajcak blandly. The situation will not spill over to hit Slovakia, he also stated, despite the country being inside the Eurozone and Bratislava having led protests against any “soft” deal for Greece.

Polish officials, meanwhile, reiterated claims that the country is in good shape to swat away any pressure that may emerge. Prime Minister Ewa Kopacz noted on June 29 that Polish banks are safe. Echoing the words of central bank governor Marek Belka the previous week, the PM added that the central bank and government stand ready to defend the currency if necessary. “We are safe, our banks are safe,” Kopacz told reporters, according to Reuters. “I spoke of large reserves, not only foreign exchange (reserves) of the central bank, but I also spoke of large reserves at the finance minister’s disposal, there are billions in reserves.”

Hungarian Economy Minister Mihaly Varga was also keen to flag up his country’s minimal links with Greece. He suggested financial markets have largely priced in developments over the past few weeks and while some rise in bond yields is likely, insists Budapest does not expect any “drastic” moves, reports Reuters.

At the same time, the government is monitoring currency and bond markets, Varga added. With a debt level at 77% of GDP, Hungary is part of a group of the most vulnerable emerging markets that depend most heavily on external financing to fund spending and service debt, according to Capital Economics. 

Varga said Budapest would be ready to act if the extent of the moves justifies this. However, the minister did not elaborate.

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