Zeina Bignier, head of DCM origination for sovereign, supra and agencies at SG, has observed a significant widening in the spreads on the secondary CDS market in early 2008 throughout Eastern Europe. Things reached a peak on 17 March, she noted, and although things have come back slightly since then, funding costs remain very high.
In Poland spreads on 10 year paper were 15bps before the credit crisis. On 17 March they were 115bps.
Poland is neither unique nor unrepresentative: Lithuanian 10 year has gone from 50bps in early 2007 to 215bps. In Latvia, spreads were around 45bps in November, compared to 300bps in mid March.
You would always expect a difference in the spreads in East and West Europe. In the past the difference has been around 60bps. “That itself was too narrow,” said Bignier, “but now it has overshot to the other extreme.”
Meanwhile, most East European countries can afford to wait for spreads – which are used as the benchmark to price the bond market, to normalise, Bignier noted, and are staying out of the market at these levels. Not so Latvia: last year it decided against refinancing in the international markets at Euribor plus 30bps, considering it too expensive. Now the cost has rocketed but, with insufficient liquidity in the domestic market to raise the financing it needs it, it has no choice.