1. Commerzbank: a chill wind for CEE
Stefan Wagstyl, FT Beyond Brics
Commerzbank, Germany’s second-largest, is in the midst of deleveraging in response to the EU-wide imposition of stricter capital requirements. Central & Eastern Europe (CEE) is in the firing line. The bank has said that it will temporarily suspend new lending outside its core markets of Germany and Poland.
EM Muser: I warned about the potential for a credit squeeze in the CEE in a recent post and it’s now moving from possibility to actuality (See: Is CEE Better Prepared This Time Around?) Western European banks dominate the CEE banking sector via subsidiaries. Most will not fully withdraw, but many will scale back support for their subsidiaries (out of precaution or necessity).
The Commerzbank announcement shows this trend is already underway. However, in and of itself, the announcement won’t have much of an effect. The bank’s exposure to the CEE region was just under just under €21bn in 2010, and this was mostly to Poland where it will continue to extend new loans.
2. Argentina’s president irks U.S. pundits
Paul Katz, Salon.com
President Cristina Fernandez is popular domestically and recently won reelection by a wide margin, but she remains a controversial figure in the international media.
Katz provides an unusually balanced picture of Argentina’s administration. He acknowledges the government’s manipulation of official inflation statistics and its intolerance of criticism, but also points out that the economy is roaring. GDP has expanded by an average of over 5% annually since 2007. Meanwhile, unemployment has fallen by half since 2003, and income inequality has narrowed.
EM Muser: Mark Weisbrot of the Center for Economic and Policy Research argues that Argentina is actually a success story that provides important lessons for the weaker euro zone economies given its rapid recovery in output and employment following its 2001 default (See: The Argentine Success Story and Its Implications).
Weisbrot’s view contrasts with the many articles that focus on Argentina’s lack of access to international capital markets and paint a pretty bleak picture of the country’s economic future (see the FT). They note that capital is flowing out of the country and foresee a sharp slowdown in economic growth.
The naysayers chalk the country’s robust economic growth up to good fortune (high commodity prices and the robust performances of the country’s trade partners). Meanwhile, Weisbrot credits the government’s unconventional economic policies. In my view, the jury is still out. Argentina’s resilience in the face of the global downturn will prove telling. While no economy is likely to remain untouched by the downturn, those economies that are healthy and well-run are likely to recover the fastest. Will Argentina be among them?
3. South African Credit Rating Outlook Cut by Moody’s on High Political Risk
Andres R. Martinez, Bloomberg
Moody’s cut the outlook on South Africa’s credit rating to negative in a move that surprised analysts. The rating currently stands at A3, four notches above investment grade. The ratings agency is concerned that factionalism within the ruling ANC party will erode the government’s commitment to responsible fiscal policies.
EM Muser: Shortly after Moody’s announcement on Nov 9th, the ANC expelled Julius Malema, the leader of its youth wing, from the party. He has called for the nationalisation of mines, raising concerns among investors. It’s unclear whether his departure is a done deal and whether this will reduce political risk as Malema may still contest the ruling.
4. Don’t panic, China’s economy is not on the rocks yet
Michael Pettis, FT op-ed
Amid the recent bearish commentary on China, Pettis provides a reality check. While he acknowledges that there are tough times ahead for China as it attempts to move its economy toward a more consumption-led growth model, he does not see a banking crisis on the horizon.
“Beijing effectively guarantees the profitability and stability of the banking system by socialising credit risk and enforcing a high spread between the lending and deposit rates. As long as the government is credible, the banks will be solvent.”
EM Muser: Pettis’ argument makes a lot of sense to me. Unlike other countries (Iceland and Ireland, for example), the Chinese government has the resources to effectively backstop its banks. In October, the government’s investment fund moved to shore up the shares of four major state-owned banks, showing its commitment to stabilising its banking system (see here).
While China looks set to avert a banking crisis, the economy still looks headed for a slowdown, as Pettis acknowledges. The question is whether it will be a hard or soft landing. (See my post: IMF’s Latest Growth Forecasts for China Look Overly Rosy)
5. Hungary to Get Tighter Grip on Municipal Finances
Gergo Racz, WSJ Real Time Emerging Europe
“Hungary’s government approved a law that would substantially revise the operation of the local government system by reshuffling jurisdictions and keeping a tighter central watch on how much municipalities spend.”
EM Muser: Good economic news out of Hungary is few and far between. While this legislation is a positive step, it’s too little too late. Last week, Fitch slashed the outlook on the country’s sovereign credit rating to negative, while S&P placed Hungary on CreditWatch with negative implications. A downgrade by any of the three would push Hungary’s credit rating to ‘junk’. (See my earlier posts: Hungary: Finally on Investors’ Radar and Fitch Raises Hungary’s Outlook to Positive: Odd Timing)
