Well it must come as something of a relief for any Italian readers we have here at AFOE to learn that UniCredit SpA, Italy’s biggest bank by assets, has definitely NOT incurred losses on the Russian interbank market. Although perhaps I should rephrase that by adding just one extra word: yet. UniCredit has definitely NOT YET incurred (significant) losses on the Russian interbank market. This important piece of information is what we can glean from today’s statement from Unicredit spokesman Marcello Berni to the effect that “We have no losses on the interbank market….The rumors come from a misinterpretation of news that came out today”

The “misinterpretation” – that lead to a 15 cents, or 7.3 percent, drop to 1.85 euros of Unicredit shares in trading today in Milan – was the result of a report from Moscow-based Interfax to the effect that UniCredit was about to sign an agreement with Russia’s central bank to get compensation for losses on interbank operations. The source for the Interfax story was UniCredit Russia Chief Executive Officer Mikhail Alekseyev. But as Marcello Berni points out Alekseyev was referring to possible support the Russian central bank has offered to financial institutions in case of losses on the interbank market, and it should not be read as meaning that such losses had already been incurred, only that Unicredit have hat-tipped the central bank to be readying the money up just in case they do.

The real roots of this problem are to be found in the fact that Unicredit has very substantial exposure to losses in a number of key Central and East European countries, and the Italian government, which already has a debt to GDP ratio of over 100%, is in no position – especially with an economy which looks set to shrink all the way through from here to 2011 – to offer much in the way of cash to support the bank. As I point out in this post, Austria (which is a much smaller country than Italy, but which has similar East European exposure) has already lined up an initial 100 billion euros to support its banks, while the Italian government has remained hesitant to be specific about anything, but seems to be talking about support which only amounts to something like 20 billion euros. So we are left with the rather undignifying spectacle of the leaders of the eurozone’s third largest economy having to rely on Muammar Abu Minyar al-Gaddafi and Vladimir Putin for vital support to keep one of Italy’s leading banks alive.

Unicredit used to also be Italy’s leading bank by market value, but since their stock has now declined by 59 percent in the last six months, and the company’s market value stands at 24.7 billion euros ($31.3 billion), it now lies behind Italian rival Intesa Sanpaolo SpA. I repeat, as far as I can see Unicredit currently constitutes the greatest systemic risk to the eurozone banking system, and people somewhere ought to be thinking very carefully about just what the plan ‘B’ is going to be if all this goes horribly wrong.

As Barcelona-based property consultants Aguirre Newman publish a report that suggests Spanish property prices may need to fall by at least 23% for the market to return to any kind of normality, we learn today that Spain’s annual inflation dropped almost a full percentage point to 3.6 percent in October, according to data from the Spanish National Statistics Office. This was the lowest level in a year as energy and food costs fell and the real economy slowed dramatically. October’s figure, in line with estimates, was down from 4.5 percent a month before, but this piece of information obscures more of Spain’s current inflation dynamic than it actually reveals. Continue reading →

Well we now have some of the details of the IMF package for Hungary, and interesting reading it makes. Hungary has in effect secured a 20 billion-euro ($25.5 billion) loan which is going to be sourced by three institutions: the IMF, the EU and the World Bank. The International Monetary Fund is going lend Hungary 12.5 billion euros, the European Union will provide another 6.5 billion euros, and the World Bank is chipping in with a symbolic 1 billion euros. (Really the reasoning behind the tripartite division of the loan may relate more to the pressure which it is thought might fall on IMF funding provision – which stands at about $250 billion at the present time – if more emerging market economies follow the lead of Ukraine, Hungary and Iceland. See this post here for more details and argumentation on this whole problem).

The forint naturally rose – to 257.05 per euro at 9:10 a.m. in Budapest – on the news, in the process getting below the psychologically important 260 mark and very near to a two-week high.

The Analyst View

“The agreement is designed to restore investor confidence and alleviate the stress experienced in recent weeks in the Hungarian financial markets,” IMF Managing Director Dominique Strauss-Kahn said in a statement in Washington yesterday.

“One way to look at the EU assistance to New Member States is that this is also part of the operation aimed at making sure Euroland banks don’t get into trouble. The banking systems in New Member States are practically owned by foreign (mainly Euroland) banks, and if their NMS subsidiaries get into trouble, that would not be good news for the holding companies either. In the current environment that is a strong additional argument for major Euroland countries to make sure that New Member States (and their banking systems) do not get into trouble because of the liquidity crunch.”
István Zsoldos, Goldman Sachs, London

“The aid package won’t make Hungary immune to the real economy effects of the financial crisis……….Where the IMF appears with its strict conditions, the requirement of consolidation inevitably leads to real economy and social consequences.”
Laszlo Andor, European Bank For Reconstruction and Development Board Member

“A sharp economic slowdown, driven by declining foreign- currency credit flows to the private sector, tight fiscal conditions and weak external demand is unlikely to be avoided”
Eszter Gargyan, Citigroup Inc, Budapest

“We expect the EU and the IMF to announce additional rescue packages for other Central and Eastern European economies in the coming days and weeks. Top of the list are the most imbalanced countries in the region – the Baltic States, Romania and Bulgaria.”
Lars Christensen, Danske Bank, Copenhagen

“All in all, the crisis seems to have been averted and even though it is no doubt a major shame that Hungary got to this situation, the authorities managed well in the rough waters, far better than Iceland (major policy mistakes in particular by the CB), Ukraine (political fragmentation still a major problem, currency peg had to be abandoned after failed interventions) and Romania where politicians remain ignorant even now, after the problems are more than evident. Bulgaria also does not seem to be prepared, though the currency board, the fiscal reserves and the significant budget surplus at least provide more cushion.”
Gábor Ambrus, 4Cast, London

Of course, none of this comes free. In effect the IMF is providing Hungary with a 17-month stand-by agreement, and just the fee for making the stand-by available will be 0.25% of the total quantity per annum, according to information provided by Central Bank (NBH) Governor András Simor in a press conference this morning (Wednesday). The rescue package is available up to the end of March 2010, with 3-5-year repayment period and an interest rate of 5-6% per annum (fixed).

And then, of course, there are the conditions. Continue reading →

As every woman who has ever had dealings with a man knows only too well, it is a lot easier for people to make promises than it is for them to keep them. And when Europe’s leaders met in Paris on the 12 October, a lot of fine promises (which were all, surely, very well intentioned) were made. The reality of having to live up to them, however, is turning out, as might only have been expected, to be much more complicated. Continue reading →

Yesterday, the Ukraine received a USD16.5bn loan from the IMF and the IMF at the same time said that it would agree with the Hungarian government on a rescue package in the coming days. Under normally circumstances this would be good news for CEE assets. However, it seems like the markets are totally giving up on CEE. This morning the Hungarian stock markets have dropped more than 10% despite the promise of an IMF package.

……it is worrying that the CEE markets continue to sell-off despite IMF’s clear commitment to support the region’s markets and economies. One might in fact see the lack of positive response to IMF’s rescue packages for Hungary and the Ukraine as an indication that these packages are in fact making the markets even more nervous that something “is seriously wrong in CEE”.
Lars Christensen, Chief Analyst Danske Bank, CEE: Markets fail to respond to IMF packages, 27 October 2008

Central European stocks declined for a fourth consecutive day on Monday, with indexes in Vienna and Budapest heading for record monthly drops, as concern mounts that the global financial crisis is going to have a severe impact on economic growth across the entire region and amidst worries that the IMF sponsored rescue packages in Hungary and Ukraine simply won’t be sufficient to avoid the worst of the damage. Concern is also mounting that there will be a process of “contagion” which will affect the whole region, and hence what we are now seeing is mounting pressure on financial systems across the CEE including, surprisingly perhaps, the Polish one. I say surprisingly, since Poland’s economy is normally thought to be rather stronger than most in the CEE and especially than those of countries like Latvia, Lituania, Estonia, Bulgaria, Romania, Hungary, Ukraine, Belarus and Serbia, all of whom are currently in negotiations of some kind or another with the IMF. Thus, we might be forgiven for thinking quietly to ourselves “if Poland falls, then god help the rest of them.” Continue reading →

Well, only seconds after I jokingly suggest in my last post that Bulgaria may be talking to the IMF even as I write, Bloomberg flash up on my screen that Romania already are – although, not for a loan, please note. But, they would say that, now wouldn’t they?

Romania is in “close dialogue” with the International Monetary Fund, though it is not asking for a loan from the lender that has offered support for Ukraine and Hungary.

“We do not have discussions about such financial support under way with Romania, but we maintain a close policy dialogue with the Romanian authorities,” the IMF said in an e-mailed statement today. “Decision makers need to send a clear signal to the markets with wage and fiscal policies that are realistically attuned to a very difficult external environment.”

This news today is not entirely unexpected, since only yesterday S&P’s downgraded Romanian foreign currency debt to what is effectively “junk bond” status.

Romania’s foreign-currency debt rating was lowered to junk by Standard & Poor’s as the global financial crisis weighs on the Balkan nation’s economy and the government boosts spending before parliamentary elections.

The rating was cut to BB+, one step below investment grade, from BBB-, with a “negative” outlook, S&P said in a statement from London today.

“Difficult global and financing condition, accompanied by expansionary fiscal and income policies ahead of the upcoming elections, have progressively heightened downside economic risks,” the ratings company said in the statement.

Updated

Three hours later I find that the Bloomberg story has been updated, and now indeed, even as I was writing my earlier post, Bulgaria was indeed busy consulting:

Bulgarian Finance Minister Plamen Oresharski will meet with IMF officials at the end of this week “as part of consultations on general policies and coordination of projections,” he said in Sofia today. The country, Romania’s southern neighbor, has sufficient fiscal reserves, exceeding government debt, and “has no intention” to borrow from the IMF, he added.

OK, more on all this as I get some time and my breath back.

Well, today I have come across three short news stories, each of which, in its own way, sent some kind of a shiver down my spine.

Iceland’s Interest Hike

First off, we have Iceland, where the central bank has just raised interest rates by a whopping six percentage points:

Crisis-hit Iceland’s central bank boosted interest rates by a massive 6 percentage points to 18 percent on Tuesday, just two weeks after it had eased policy to soften the impact of the country’s financial meltdown.

Now, I know they have to do something like this, but just think about it for a moment. Eighteen precent is a very attractive rate for you if you put your money there (and assume that the banks don’t default) – but how the hell are the Icelanders themselves going to pay all the interest that people will be clocking up?

Bulgaria’s Fiscal Surplus

Then we have Bulgaria, which is probably only days away from visiting the IMF itself at this point (assuming that is that they haven’t been already sounding them out). Now Bulgaria, as we know, has in the past been accused of running profligate government spending policies, even while its economy was booming. Heavy government spending under these circumstances simply makes existing overheating worse, and Bulgaria’s inflation not unsurprisingly went right through the roof. But now the whole process been transformed into its opposite (rather like in one of those scenarios where global warming leads to a new ice age). So I was really shocked to read the following:

Bulgaria plans to keep its tight fiscal policy and run a budget surplus of at least 3 percent of GDP in 2009 to protect the economy from the global financial meltdown, its 2009 draft budget showed on Monday.

This is really getting everything back to front, lax fiscal policy when you are overheating, and fiscal surpluses as you go into a “sudden credit stop” driven deep recession. Bad timing isn’t in it. This is simply madness.

EU Commissioner Almunia

And then there is Almunia – our dear and beloved Economy and Finance Commissioner Joaquin Almunia. I was really astonished – even horrified – to read this:

The European Union’s Economic and Monetary Affairs Commissioner Joaquin Almunia said on Monday that while lower financing costs were needed interest rates should not fall to negative levels in real terms.

“At this moment, it would be good for the cost of financing to go down,” Almunia told a live Internet chat with readers of Spanish newspaper El Pais (www.elpais.com), adding: “We shouldn’t go back to a situation in which real interest rates are negative, as we know from experience that this leads to excess indebtedness, low perception of risk and new bubbles which always end by blowing up in our faces.” Almunia said it was hard to say how long the present bout of financial turbulence would last but he thought the uncertainty plaguing markets should have cleared with a year.

Essentially two things are being confused here. Negative interest rates (such as those Spain had between 2002 and 2006) are highly undesireable during the upswing in a business cycle, since you are simply giving more stimulus to economies which are already stretched to capacity – and may thus produce “bubbles”, as they did in Ireland and Spain – but they are of course highly desireable during the downturn, and especially during recessions. We are currently heading into one of the most important recessions since WWII, or hadn’t our commissioner noticed?

I mean, basically the man is a total economic illiterate. Of course, there is no harm in that you may say, since many people are seriously challenged by the complexity of economic processes. Well quite, but this particular gentleman is supposed to be handling economic policy over at the EU commission, and he seems to have even less idea of how things work than they do in Bulgaria (with no disrespect, or negative stereotyping, intended towards Bulgaria, but simply the EU is supposed to be showing the new members how to do things, and if the Commission itself has no idea, then what chance is there for the rest of them).

Hungary announced on Sunday that it had reached agreement with both the International Monetary Fund and the European Union on a broad economic rescue package, which will include substantial financing, in a bid to stabilize a Hungarian economy which has been both shaken by the global financial crisis and faces long term macro economic and structural problems which make any easy solution to the situation hard to expect.

“A substantial financing package in support of these strong policies will be announced when the program is finalized in the next few days,” IMF Managing Director Dominique Strauss-Kahn said in a statement that did not indicate the size of the package.

Hungary announced the loan at more or less the same time as Ukraine received a USD16.5bn loan from the IMF. Under normal circumstances both these moves would be good news for Central and East European equity markets assets. This was not the case on this occassion, however, and Hungary’s stock markets fell more than 10% on opening yesterday, suggesting that either investors are not convinced the packages will be sufficient, or that they fear there is more to come. Continue reading →

Hungarian Prime Minister Ferenc Gyurcsány announced yesterday (Wednesday) that the government had reached an agreement with commercial banks intended to protect the interests of those who have taken out foreign currency loans.

The agreement, which is expected to be signed early next week, has three key components:

1) At the request of the debtor the banks will allow the duration of the loan to be extended (with fixed monthly instalments) so that the depreciation of the forint “does not place an unbearable burden on the debtors”.

2) FX debtors who deem that exchange rate fluctuations carry excessive risks for them will be allowed to convert their foreign currency-based loan to a forint loan. In this case the banks “will accept this request and make the switch without extra charges”.

3) If a debtor finds him- or herself in a position where he or she cannot pay the monthly instalments, e.g. due to becoming unemployed, the banks will be amenable to transitionally reducing the instalments or even suspending them entirely at the request of the debtor.

I say “agreement” here, but in fact the banks had little alternative, since Gyurcsány made it plain to them that if they did not agree then legislation would be introduced to enforce the government package.

So here, right now, and on 23 October 2008 in Budapest ends, in my opinion, a fashion for taking out non-local currency denominated loans, which lasted the best part of a decade and sewpt across half a continent, and especially in Central and Eastern Europe . Basically government after government in one CEE country after another will now find themselves with little alternative but to follow Hungary’s lead, as the parent banks turn off the tap on the one hand and the citizens themselves grow more and more nervous on the other. Continue reading →