Tuesday, July 12, 2011

Roubini Global Economics Warns on Eastern Europe

Ed Hugh at RGE looks at the eurozone beyond the PIIGS and concludes:
This underlying reality constitutes an unstable combination which make the [Eastern European] countries concerned highly vulnerable to both a renewed deterioration in sentiment and an external economic slowdown of the sort we could see following a disorderly Greek default, and yet markets in general seems to be shrugging off the risk as almost non existent. “Smoke on the horizon” the admiral said as he lowered the telescope from his blind eye, “I see no smoke on the horizon”.
Hugh on Slovenia and Slovakia :
The spread on Slovenian and Slovakian CDS has surged in recent months, not because short term risk of sovereign default in either of these two countries has increased notably, but simply because these two countries as members of a Eurozone with known problems, and real contagion dangers, are now seen as being more risky...True Slovenian and Slovakian CDS are still comparatively low risk priced (Slovenia at 109 and Slovakia at 102) but it is the direction and velocity of the movement which is striking.
On Bulgaria:
Bulgarian CDS (currently around 225) have been steadily moving down all this year, and in sharp contrast to what happened in June last year, have so far not responded to the Greek crisis, despite the fact that Bulgaria’s banks are quite dependent on their Greek parents for funding.
On Romania:
The picture in Romania is rather similar, with the current price of 250 being well off last years highs of around 415, which means that markets are currently perceiving risk in Spain and Italy as more pronounced than those in Bulgaria and Romania. Certainly I would not want to argue that risk in both the aforementioned countries is high, but I am not at all convinced that contagion risk in the latter two is anything like as low as is being suggested, which is presumably why Nomura was recently advising clients in a research note to sell South African CDS and buy the wrongly priced Bulgarian and Romanian ones
On Hungary:
Arguably the Hungarian case is the most glaring one, since it is the East European country with the highest debt to GDP levels (around 80%) it has very high gross foreign debt (around 135% of GDP, of which 45% is forex denominated), and it is a country where institutional quality is a constant cause for concern. In many ways Hungary is the Italy of the East.

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