Even when the iron curtain still hung across the region, the countries of Central and Eastern Europe were not economically uniform. The Czech Republic, for example, was always better off than Romania, and the macroeconomic outlook in Slovenia always a little less grim than in Bulgaria. It reflects the variety of approaches and experiences that the introduction of a market-based system has not swept away. This diversity also explains why not all of CEE has been equally hard hit by the downturn.
“Central and Eastern Europe is not just one amorphous region, sinking without trace," said Penny Smith head of EM corporate debt origination at Commerzbank. "There are many different countries in quite different economic situations and each should be reviewed in its own right.”
There is, of course, no question that some of the economies in CEE are very much challenged by the disappearance of cheap money. Hungary, for example, has a great deal of external debt that it may struggle to service.
Other countries are faring relatively well. "Poland, Slovakia, the Czech Republic, Slovenia, and to some extent Croatia could get support from international bank lenders," said Thomas Haedicke, head of primary loan distribution at RZB in Vienna. "Further support from the EU and from multinational institutions plays an important role for some investors in deciding where to lend."
Many banks cite the recent agreement reached by the EBRD, IMF, EU and the World Bank Group to provide US$20bn in financial support to Romania as a positive step.
Lenders are, however, being picky - and they can afford to be. “There are only 5-10 banks looking at lending in CEE at the minute, compared to around 20 in the past," said Lothar Schlichting, head of DCM loan distribution EM & FI at Commerzbank. "At the same time, the number of institutions looking to lend in Western Europe is increasing, because they can get what used to be emerging market pricing for what is relatively limited risk.”
Such a tough market has made the assessment of relationships unsentimental. "Relationship pricing is a concept that doesn’t exist at the moment. Relationship banks are those that are willing to lend," said one banker. The market focus is on reducing risk. Those loans that do come to the market will be quasi-clubs. "The borrowers don't want to take market risk posed by syndication and the lenders want to try to syndicate as far as possible, after putting together a club, to either reduce their positions immediately or raise additional volume," said Haedicke.
All of the bankers agree that "cheap" club deals are a thing of the past. Each deal has to stand on its own merits and the club approach reinforces this dynamic. "The lack of real syndication, and the dearth of secondary demand, means that banks quickly reach their own internal country limits," said Schlichting. "When that happens, it becomes very difficult to continue to support the next deal.”
Some of the most frequent borrowers in the CEE region over the past few years have been FIs, which have an obvious role to play in keeping money flowing locally. Ominously, there is limited appetite for lending to them: they have been prolific borrowers in the past, while lenders also have economic concerns. The Baltics are cited as one no-go area. "There have been no FI loans in CEE so far this year," said Schlichting. "However, talks between some FIs and their closest relationship lenders have just started. Tenor will be an issue – as will pricing. Anything over two years would be difficult.”
Haedicke expects the "systemically important" FIs to tap the loan market this year - pointing out that most of them are owned by well-established banks in "old" EU countries. "Amongst these banks, solidarity will play an important factor," he said. An early example of the trend may be RZB in Croatia, which is currently in the market looking for around €100m.
Does that mean the lights are flickering on lending in CEE not backed by multinational institutions, or those international banks with a vested interest in the region? Investors should stay put, advised Haedicke. "There is still huge potential in various economic areas in emerging markets," he said. "If you have excess liquidity, invest in Central and Eastern Europe now!"