Central, East European countries seen less vulnerable from default risk
Central, East European countries seen less vulnerable from default risk
12:57, March 12, 2010 
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Financial market's sentiment toward sovereign debt in the countries of the Central and Eastern Europe (CEE) began to reflect calmer waters as countries in the region announced austerity measures to curb the fiscal deficits.
Rating companies are still precautious and send different signals describing the particular risks, but the outlook is brighter in some cases.
Standard & Poor's on Tuesday raised its outlook on Romania from negative to stable, as a response to the austerity measures planned by the government, in compliance with the terms of agreement of the International Monetary Fund (IMF).
Earlier last month Fitch Ratings also raised the outlook of its credit rating attributed to Romania to "stable" on the same reasons. Both credit rating companies had penalized Romania and Latvia as the most risky countries in the European Union.
The return to investment grade universe is not an easy attempt, said Marko Mrsnik, credit analyst at Standard & Poor's.
"As we point out in the report, if the Romanian government maintains the momentum of its current structural reform beyond the horizon of the EU Standby Agreement, building a sustained track record of fiscal prudence and ensuring an orderly containment of vulnerabilities in the country's financial sector, we could eventually raise the ratings," said Mrsnik in an interview with Xinhua.
Moody's is the only credit rating company which maintained Romania's investment grade and recently expressed no intention to change the score.
Last year, Romania's public deficit stood at 7.2 percent of the country's gross domestic product (GDP), and this year, if the policies remain unchanged, the fiscal deficit will stand at around 8.4 percent of the GDP, according to the IMF.
Bulgaria has been warned by Fitch that it may see its credit rating lowered to junk grade as its external debt will exceed the total output, which may threaten the financial stability. Bulgarian authorities slapped the sharp comments of Fitch, revealing that it was trying to negotiate the contract with the rating company.
But all rating companies signaled worries toward the negative influence of the downturn of Greece's economy on Bulgaria, and regarding the slippage on fiscal deficit in the first month of the year. The current account deficit deteriorated in the last part of 2009, raising concerns on the future financing of the huge gross external debt of 37.6 billion euros (51.3 billion U. S. dollars), which stands for 111 percent of the economy.
The national currency, leva, is pegged to euro and the central bank has no tools for intervention, so that the government is obliged to keep a fiscal surplus. But Bulgaria's sovereign debt is only 15 percent of the GDP, one of the lowest in the region.
CDS'S PARADOX
Markets are optimistically signaling less danger on the default front for sovereign bonds issued by CEE countries, analysts said.
"The Credit Default Swaps (CDS)' prices for the CEE countries fell. Romania's CDS is lower than that of Greece, a country with a higher rating, which means that it costs more to insure against a Greek sovereign default than against a Romanian one.
The CDS becomes a benchmark for risk, but it is an emotional signal, a perception and sometimes hides an high appetite for risk," said Lucian Anghel, chief economist at the Romanian Commercial Bank, the largest bank in Romania.
LOW LEVEL OF DEBTS
Albeit the fact that almost all the countries in the CEE region run high government deficits to fight the crisis, they enjoy less debt relative to their GDP, analysts noted.
"Apart from Hungary, all CEE countries have kept their public debt below 60 percent of the GDP. Hungary's public debt is estimated at about 80 percent of the GDP for 2009, exactly the euro area average level," said Juraj Kotian, senior analyst at the Erste Bank.
The combine public debt of the Czech Republic, Slovakia, Hungary, Romania and Croatia rise up to 200 billion euros (273 billion dollars), which is less than single Greece, he noted.
"Adding Poland, the public debt of this group of six CEE countries (CEE 6) is estimated at 350 billion euro (477.75 billion dollars), and that is less than debt of Spain (690 billion euros or 941.85 billion dollars) and represents one fourth from the debt of Italy (1,760 billion euros or 2,402 billion dollars)," argued the Erste Bank's analyst.
The debts of CEE countries are not captive to the financial markets. Some of them have already relied on the support of financial agencies, such as the IMF or the World Bank, a luxury that troubled economies inside the eurozone can not afford. Greece was a powerful example in this respect.
Others are afraid to invite the IMF to scrutinize the national accounts, as they dislike the unpopular measures it may suggest.
DEPENDENCE ON SHORT-TERM LENDING
But all countries in the CEE market found most of the money to feed fiscal deficits and pay their debts in the internal market, a situation considered by some analysts as an advantage, while others believed that is providing the fuel for new risks.
The advantage of raising more money from internal market is related to the national currency, as the speculative investors, usually hedge funds, may rush away with the money at the first negative signal from the economy, depreciating the currency.
"The share of government securities held by non-residents, which might speed up the sell-off, is relatively low -- in CEE 6 it is about one fourth of total public debt or 2-23 percent of the GDP -- compared with two thirds in Greece (or almost 90 percent of the GDP)," said Kotian of the Erste Bank.
But this advantage could be an illusion, said the last S & P survey on European Sovereign Issuance, as most of the region's countries borrowed money on short terms, due to the scarcity of their banking market's funds and their high costs.
"One further notable change in the sovereign debt structure in our view has been the rise in the share of short-term debt as a result of greatly accelerated short-term borrowing," said Stukenbrock, adding that S & P expects a significant drop in short-term debt.
More than one third (39 percent) of Romania's debt was borrowed on short-term conditions with the risky consequence of raising the amount of money which have to be paid back this year.
This year, Romania's debt-rollover ratio, which includes the amount of long-term debt maturing plus the previous year's stock of the short-term debt, is one of the highest in the region, amounting 35.8 percent of total debt and 12 percent of its GDP, according to S&P.
"I don't see a problem in the short-term debts, the Finance Ministry may at any time take a long-term loan, as banks are interested to finance it. The non-governmental credit will not absorb all the money available and, if necessary, the central bank could release some of the minimum reserves, so it can always inject liquidity into the market. The central bank has been very cautious and it is the only one who can relax its policies," Lucian Anghel, chief economist at the Romanian Commercial Bank, told Xinhua.
TAPPING THE MARKET
CEE countries are interested to regain access to external capital markets, now that investor's sentiments ameliorate.
Hungary successfully tapped the external capital markets twice while it was under a stand-by agreement with the IMF, in July 2009 and again in January 2010, despite further official funding being available until at least fall 2010, noted S & P's Stukenbrock.
Romania intends to sell this month a 1-billion issue of Eurobonds with maturity in five years on external capital markets, managed by Deutsche Bank AG, EFG Eurobank and HSBC Holdings Plc.
Finance Minister Sebastian Vladescu said earlier that Romania might launch other commercial borrowings from international capital markets this year, but did not indicate a figure.
The Czech Ministry of Finance ponders the potential issue of Eurobonds that could reach a volume of around 3 billion euros (4.09 billion dollars), according to a Raiffaisen Bank report.
The Polish Ministry of Finance announced that in the second quarter of 2010 a U.S. dollar-denominated Eurobond worth 1.5 billion dollars will be issued as part of the 3 billion euro (4.09 billion dollars) financing needed for the rest of 2010, said Raiffeisen.
Right now the shield that protects Romania and Hungary from the investor's doubts about the sustainability of the government debt are austerity fiscal programs shaped by the IMF.
Source:Xinhua
Rating companies are still precautious and send different signals describing the particular risks, but the outlook is brighter in some cases.
Standard & Poor's on Tuesday raised its outlook on Romania from negative to stable, as a response to the austerity measures planned by the government, in compliance with the terms of agreement of the International Monetary Fund (IMF).
Earlier last month Fitch Ratings also raised the outlook of its credit rating attributed to Romania to "stable" on the same reasons. Both credit rating companies had penalized Romania and Latvia as the most risky countries in the European Union.
The return to investment grade universe is not an easy attempt, said Marko Mrsnik, credit analyst at Standard & Poor's.
"As we point out in the report, if the Romanian government maintains the momentum of its current structural reform beyond the horizon of the EU Standby Agreement, building a sustained track record of fiscal prudence and ensuring an orderly containment of vulnerabilities in the country's financial sector, we could eventually raise the ratings," said Mrsnik in an interview with Xinhua.
Moody's is the only credit rating company which maintained Romania's investment grade and recently expressed no intention to change the score.
Last year, Romania's public deficit stood at 7.2 percent of the country's gross domestic product (GDP), and this year, if the policies remain unchanged, the fiscal deficit will stand at around 8.4 percent of the GDP, according to the IMF.
Bulgaria has been warned by Fitch that it may see its credit rating lowered to junk grade as its external debt will exceed the total output, which may threaten the financial stability. Bulgarian authorities slapped the sharp comments of Fitch, revealing that it was trying to negotiate the contract with the rating company.
But all rating companies signaled worries toward the negative influence of the downturn of Greece's economy on Bulgaria, and regarding the slippage on fiscal deficit in the first month of the year. The current account deficit deteriorated in the last part of 2009, raising concerns on the future financing of the huge gross external debt of 37.6 billion euros (51.3 billion U. S. dollars), which stands for 111 percent of the economy.
The national currency, leva, is pegged to euro and the central bank has no tools for intervention, so that the government is obliged to keep a fiscal surplus. But Bulgaria's sovereign debt is only 15 percent of the GDP, one of the lowest in the region.
CDS'S PARADOX
Markets are optimistically signaling less danger on the default front for sovereign bonds issued by CEE countries, analysts said.
"The Credit Default Swaps (CDS)' prices for the CEE countries fell. Romania's CDS is lower than that of Greece, a country with a higher rating, which means that it costs more to insure against a Greek sovereign default than against a Romanian one.
The CDS becomes a benchmark for risk, but it is an emotional signal, a perception and sometimes hides an high appetite for risk," said Lucian Anghel, chief economist at the Romanian Commercial Bank, the largest bank in Romania.
LOW LEVEL OF DEBTS
Albeit the fact that almost all the countries in the CEE region run high government deficits to fight the crisis, they enjoy less debt relative to their GDP, analysts noted.
"Apart from Hungary, all CEE countries have kept their public debt below 60 percent of the GDP. Hungary's public debt is estimated at about 80 percent of the GDP for 2009, exactly the euro area average level," said Juraj Kotian, senior analyst at the Erste Bank.
The combine public debt of the Czech Republic, Slovakia, Hungary, Romania and Croatia rise up to 200 billion euros (273 billion dollars), which is less than single Greece, he noted.
"Adding Poland, the public debt of this group of six CEE countries (CEE 6) is estimated at 350 billion euro (477.75 billion dollars), and that is less than debt of Spain (690 billion euros or 941.85 billion dollars) and represents one fourth from the debt of Italy (1,760 billion euros or 2,402 billion dollars)," argued the Erste Bank's analyst.
The debts of CEE countries are not captive to the financial markets. Some of them have already relied on the support of financial agencies, such as the IMF or the World Bank, a luxury that troubled economies inside the eurozone can not afford. Greece was a powerful example in this respect.
Others are afraid to invite the IMF to scrutinize the national accounts, as they dislike the unpopular measures it may suggest.
DEPENDENCE ON SHORT-TERM LENDING
But all countries in the CEE market found most of the money to feed fiscal deficits and pay their debts in the internal market, a situation considered by some analysts as an advantage, while others believed that is providing the fuel for new risks.
The advantage of raising more money from internal market is related to the national currency, as the speculative investors, usually hedge funds, may rush away with the money at the first negative signal from the economy, depreciating the currency.
"The share of government securities held by non-residents, which might speed up the sell-off, is relatively low -- in CEE 6 it is about one fourth of total public debt or 2-23 percent of the GDP -- compared with two thirds in Greece (or almost 90 percent of the GDP)," said Kotian of the Erste Bank.
But this advantage could be an illusion, said the last S & P survey on European Sovereign Issuance, as most of the region's countries borrowed money on short terms, due to the scarcity of their banking market's funds and their high costs.
"One further notable change in the sovereign debt structure in our view has been the rise in the share of short-term debt as a result of greatly accelerated short-term borrowing," said Stukenbrock, adding that S & P expects a significant drop in short-term debt.
More than one third (39 percent) of Romania's debt was borrowed on short-term conditions with the risky consequence of raising the amount of money which have to be paid back this year.
This year, Romania's debt-rollover ratio, which includes the amount of long-term debt maturing plus the previous year's stock of the short-term debt, is one of the highest in the region, amounting 35.8 percent of total debt and 12 percent of its GDP, according to S&P.
"I don't see a problem in the short-term debts, the Finance Ministry may at any time take a long-term loan, as banks are interested to finance it. The non-governmental credit will not absorb all the money available and, if necessary, the central bank could release some of the minimum reserves, so it can always inject liquidity into the market. The central bank has been very cautious and it is the only one who can relax its policies," Lucian Anghel, chief economist at the Romanian Commercial Bank, told Xinhua.
TAPPING THE MARKET
CEE countries are interested to regain access to external capital markets, now that investor's sentiments ameliorate.
Hungary successfully tapped the external capital markets twice while it was under a stand-by agreement with the IMF, in July 2009 and again in January 2010, despite further official funding being available until at least fall 2010, noted S & P's Stukenbrock.
Romania intends to sell this month a 1-billion issue of Eurobonds with maturity in five years on external capital markets, managed by Deutsche Bank AG, EFG Eurobank and HSBC Holdings Plc.
Finance Minister Sebastian Vladescu said earlier that Romania might launch other commercial borrowings from international capital markets this year, but did not indicate a figure.
The Czech Ministry of Finance ponders the potential issue of Eurobonds that could reach a volume of around 3 billion euros (4.09 billion dollars), according to a Raiffaisen Bank report.
The Polish Ministry of Finance announced that in the second quarter of 2010 a U.S. dollar-denominated Eurobond worth 1.5 billion dollars will be issued as part of the 3 billion euro (4.09 billion dollars) financing needed for the rest of 2010, said Raiffeisen.
Right now the shield that protects Romania and Hungary from the investor's doubts about the sustainability of the government debt are austerity fiscal programs shaped by the IMF.
Source:Xinhua
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