Bankers caution on market reprieve

15/05/2009 | Taimur Ahmad, Simon Pirani

The optimism sweeping markets in recent weeks belies the fact that central and eastern Europe’s real economy has further to fall, senior bankers have warned.

Hans Joerg Rudloff, chairman of Barclays Capital, said that the rebound in global markets could prove a disappointment. “It’s purely playing out the cycle. There inevitably comes a point where the market is just left with long term money. Is it justified? No one can say that with conviction.”

Rudloff, who sits on the board of Rosneft, Russia’s largest oil company, said: “There’s no euphoria whatsoever, it’s simply that the markets have started to work again. What we are seeing is the relief that we stopped the slide, but how we climb back to a healthy level isn’t clear. You have stabilisation at a very low level. “The risk [of another crash] still exists but that depends on the the deficiencies of the markets and our economic model.”

Herbert Stepic, chief executive of Raiffeisen International, told Emerging Markets in an interview: “We are now entering a very severe crisis of the real economy.” The real economy “will deteriorate further”, Stepic warned. “We will see further increasing non-performing loans (NPLs) – more in some countries, less in others – but all in all they will increase everywhere.

“We will reach the bottom by the end of this year or the middle of next. We will have a relatively long ‘U’ shaped development, before we see a slightly positive reaction in 2011. We will only be able to talk about normality in mid 2011.”

Because the origin of the crisis was external to the region, “countries that are very export dependent, such as Hungary, also Ukraine, but also countries like Czech republic, are hit first. “The crisis came from the west; the west is not importing any more, so the east can not export. That leads to unemployment, factory closures, and the pattern that we know.

“Different countries are at different stages. For example, Romanic is only 35% dependent on exports. so its real economy is much less hard hit by the financial crisis. There is a much smaller number of NPLs. Ukraine is at the forefront of the crisis, because there a number of issues came together: raw material prices, lack of funding, political imbalances in the economy, and huge corruption.”

Russia is in a different position, due to its foreign currency reserves position and the possible recovery of raw material prices. “The problem in Russia is different: it’s the problem of the indebtedness of private industry and also the huge non consolidated banking industry.”

A crucial element in the economic downturn is the evaporation of private capital flows. The Institute for International Finance (IIF) estimates that private capital flows to emerging Europe will equate to just 1% of GDP in 2009, compared with 13% of GDP in 2007.

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