Economy
Ukraine is heading for sovereign default - Nicholas Spiro
Portfolio: Where do you think the Russia-Ukraine crisis (going on for six months now) will lead in these countries, strictly from an economic point of view? Should Ukraine be prepared to lose the eastern regions of Donetsk and Luhansk?
Russia is now turning inwards, rolling back years of economic integration with the West. Ukraine's economy has collapsed, its banking sector has been crippled by the sharp fall in the currency and the country is heading for a sovereign default. The IMF package, as it currently stands, is woefully insufficient to avert a major financial crisis.
P.: In view of the deteriorating business cycle indicators in Europe, what real economic impacts do you think the mutually imposed sanctions will have in Europe and globally? Do you think a new European recession is around the corner?
N.S.: The impact of the tougher sanctions regime on Russia and the retaliatory measures imposed by Moscow are plain for all to see. Germany's economy - which has the most to lose from a trade perspective - has weakened considerably over the past two quarters, with the latest Ifo survey throwing the protracted nature of the slowdown into sharp relief.
What's bad for German growth is particularly bad for eurozone growth - and bodes ill for Central Europe. Although the eurozone is likely to avert a technical recession, the recovery has stalled and the seeds of the next financial crisis are being sown.
P.: Several countries in central and eastern Europe are totally dependent on Russian natural gas and they are also feeling a pinch of trade relations turning less amicable. In your baseline scenario how can the crisis affect growth in the Visegrad Four countries?
N.S.: The Ukrainian crisis has already had a discernible impact on growth in Central Europe - particularly in Poland - and is accentuating the severe disinflationary pressures in the region. Hungary and the Czech Republic are holding up surprisingly well but are likely to slow somewhat in the third and fourth quarters given the twin headwinds of a deteriorating eurozone economy and the fallout from a tougher sanctions regime.
P.: After concluding QE3 in November the Fed could start rate hikes sometime next summer. How ready do you think the market is for this “new world"? Also, what do you think this will bring about for emerging markets, such as Hungary, which are considered to be more vulnerable?
N.S.: While the first rise in US interest rates for eight years constitutes a major stress test for the sentiment-sensitive EM asset class, this is not 1994 - both from a Fed standpoint as well as an EM one. This time round the Fed is “holding the markets’ hand" and will keep rates at relatively low levels even after it starts hiking them.
The EM asset class, moreover, is a much more resilient one because of the improvement in underlying fundamentals over the past decade and, crucially, markets’ greater propensity to differentiate between credits during periods of financial stress. Hungary is considerably less vulnerable than it was several years ago but its central bank has been throwing caution to the wind by cutting interest rates below Poland's (which is a much stronger credit) and waging war on the foreign-owned banking sector.
P.: Hungary’s forint has recently slumped to 2.5-year lows versus key currencies. Considering a few specific factors (a relief package for FX borrowers in the making in Hungary, a rising yield environment in the U.S. and a declining one in Europe, the Hungarian central bank’s commitment to keep its key policy rate low for an extended period) what is your outlook on the forint for the following period?
N.S.: The forint was looking very vulnerable even before the Ukrainian crisis escalated. The central bank's tolerance for a weaker forint renders the currency even more vulnerable to deteriorating sentiment and we expect the forint to remain under pressure after the Fed ends its asset purchases next month and speculation intensifies about the timing and pace of US rate hikes.
