Central and Eastern Europe* – a collection of countries that are as economically diverse as they are geographically close. As such, the region offers a fascinating laboratory for an analysis of the global downturn.
Regardless of currency, size of economy or the level of reform so far undertaken, CEE countries have been hit hard by the disappearance of liquidity from the financial system and plummeting prices across asset classes.
Membership of the euro is perhaps the most obvious characteristic that divides the region. Austria, Montenegro, Slovakia and Slovenia benefit from membership of the club, providing some stability to anchor their economies, while those with still independent currencies have seen their values come under extreme pressure.
Among the outsiders, Hungary, Poland, Latvia, Lithuania and Estonia are seen as the closest to membership. But while there has been much debate about the prospect of speeding up their entry, this is seen as unlikely amid such a turbulent backdrop. The “old economies” of Europe are nervous enough about their own situation and are reluctant to offer a helping hand to the east, for fear that they will themselves be pulled into another quagmire.
In terms of sovereign issuance, Austria remains on a different plane to its CEE neighbours. Other countries in the region have shared the nervousness about rising levels of debt that has plagued the most advanced economies around the world. Those outside the euro look worse off than those inside, and for the smaller economies, issuance looks a remote prospect.
Evidence of the adaptability and durability of the market is perhaps most evident in the birth of the government-guaranteed senior debt market. Issuance here has to some extent offset the decline of the subordinated market.
In the loan markets the downturn has been evident but less spectacular, dropping off from what were relatively low levels compared to the frenzied lending previously seen in other parts of the world. Here again regional diversity frustrates neat generalisations: Hungary faces a problem servicing its significant external debt, while Poland is among those expected to have less difficulty in getting support.
Equity markets have been decimated and issuers are loath to come to market for an IPO or to raise capital unless it is absolutely vital. The Warsaw Stock Exchange has done enough to convince many that it remains a force for the future, and although activity has dried up, it is expected to pick up again next year. Nevertheless, London remains the key obstacle to its ambitions to become the regional hub.
For all their diversity, CEE countries share notable challenges. While global demand has been hit hard, what little dynamism there is left appears to centre on Asia, particularly China, which seems a long way away from the factories of Warsaw and Budapest. And with protectionist forces gathering momentum, the region must hope that the global recession does not undermine all the advances it has made in recent years.
* defined as: Albania; Austria; Bosnia and Herzegovina; Bulgaria; Croatia; Czech Republic; Estonia; Hungary; Latvia; Lithuania; Former Yugoslav Republic of Macedonia; Montenegro; Poland; Romania; Slovakia; Slovenia; and Serbia.