A Forex View From Afar

A Trader's Look At A Trader's Life

Forex Analysis

Eastern Europe

Written by A Forex View From Afar on Tuesday, February 17, 2009

The latest drag for the Euro-area appears to be the Eastern European economies, which had their financial system hit very hard by the credit crunch.

A rather large number of European banks have exposure to Eastern Europe, including Raiffeisen, Erste Group, Societe Generale, RBS and UniCredit SpA. As such, any problem that rises in the emerging European countries will create problems in the main-bank, or mother-bank.

Banks with subsidiaries to the Eastern European market have tried to cut back their exposure lately, reducing the available funds for the local branches. Therefore, the local central banks were the only ones able to provide the much-needed liquidity, but so far they appeared to be overwhelmed by the demand side. The IMF was just a call away, which had to bail out some countries with $50 billion.

The problems the economies face are huge deficits (much higher than the European Union’s target of 3% of GDP) and ratings downgrades from the major rating agencies. From one point of view, these deficits are a rather huge problem since the Eastern economies grew in the last years at a very strong pace, outperforming by far the Western economies, but still run quite large deficits. Economics 101 says that deficits must be run mostly during the slowdown periods, to help kick start the economy, not when the economy is booming, or you will risk overheating it.

The biggest problem with the Eastern European economies is that their debt is denominated in foreign currencies. Consumers have been lured by the ultra-low rates on foreign currencies, compared with the local ones. In Hungary, the official interest rate was 10%, Poland 7%, Ukraine 16% and Romania 11%.

Investors running from the country, creating a net outflow of cash, will ultimately depreciate the local currencies. The Hungarian Forint and the Polish Zloty tumbled at record speed in the past months, reaching the lowest value seen in the last few years. This adds pressure on consumers, making them choose between defaulting on their loans, which would put additional stress on the banking system, and cutting back their expenses, which would ultimately affect the economy.

However, up to now, these problems have not materialized despite the currency plunge. Still, the default rate has not risen dramatically in percentage terms, and retail sales have fallen, but in-line with the declines seen in the Euro-area. From where we stand right now, it still appears to be a liquidity problem in the Eastern European economies, rather than a solvency problem, as in the Western economies. Liquidity problems have been caused by foreign banks that reduced their funds for the local branches, and by investors withdrawing their portfolio investments. Even so, it should be noted that the line between liquidity and solvency problems is very thin.

Related Posts by Categories

  1. 0 comments: Responses to “ Eastern Europe ”

TheLFB Team & The View From Afar Blog

© 2008 A Forex View From a far Trading Blog

Trade Desk View

Fundies and Trading
There is a constant question from some traders as to why anybody would ever need to consider the ‘F’ word when trading. Fundamentals: what is so damaging at looking at both Technical charts and having a Fundamental filter to gauge how many Lots to put on? Why is it that accepting that Technicals give us price points to trade, but Fundamentals determine the direction that we travel is so difficult for some traders to accept? Without a Fundamental Filter very few pure Technical traders would have seen this Dollar move coming today.

Want to subscribe?

Subscribe in a reader.