January 18, 2013 / 10:59 AM / 5 years ago

CEE MONEY-Low yields trigger rush to bond mkts in East Europe

* Loose policy at big cbanks pushes emerging yields lower

* Countries lining up to tap euro, dollar bond markets

* Eurobonds will help some govts to seek IMF help

* Concern over what will happen when liquidity fades

By Michael Winfrey and Jason Hovet

PRAGUE, Jan 18 (Reuters) - The tide of cash flowing from the world’s top central banks is lifting a new set of boats: the countries of emerging Europe.

Plunging borrowing costs triggered by monetary easing at the European Central Bank and the U.S. Federal Reserve have sent the region’s governments scrambling to hit international bond markets early and hard this year.

Appetite from yield-hungry investors will help some, like those in Hungary, Slovenia, and Serbia, avoid having to ask for backstops from the International Monetary Fund and to endure the unpopular austerity measures it often demands.

For others, it will lock in borrowing costs at multi-year or record lows, a boon for policymakers struggling to cut budget deficits while also keeping growth alive.

“A low funding cost is good news that creates room for the government in managing its debt,” said Batara Sianturi, Region Head for Hungary, the Balkan and Baltic regions, for Citigroup.

“We are going to have for the next two years a very low interest rate environment. Investors will continue to hunt for high-yield assets.”

Earlier in the crisis, cheap funds from the major central banks poured into more liquid emerging assets, causing spikes in the currencies of countries such as Turkey and Brazil.

But now longer term investments are feeling the benefit, with Europe’s former communist economies in particular seen as relatively stable bets with no risk of immediate default, unlike some of their high profile neighbours in the euro zone.

Investment banks JP Morgan and Deutsche Bank expect emerging European governments, including heavyweights Turkey and Russia, to borrow around $40 billion this year on international markets.

Poland, Slovakia, and Turkey, have already been fast out of the blocks. Ankara has issued 10-year debt at 3.47 percent, its lowest ever yield in dollars. Poland attracted demand for 1.7 billion Eurobond last week at 65 basis points over mid-swaps and is looking for at least 250 million euros in private placement.


Hungary mandated banks to arrange meetings with U.S. and European investors this week for its first foreign bond issue, probably in dollars, since 2011.

The announcement ended all doubt that Prime Minister Viktor Orban’s government - involved in cat-and-mouse discussions about starting aid talks with the IMF - intended to close a deal if it could find funding elsewhere.

Budapest has openly clashed with the Fund since Orban took power in 2010 and declared Hungary should regain its “economic sovereignty”. Since then he has pushed through a battery of unconventional policies, including a bank tax - Europe’s highest - that the Fund has criticised.

Despite that, foreign investors unimpressed by meagre returns on developed markets have flooded into emerging Europe and has driven the yield on “junk” rated Hungary’s 5-year benchmark bond to under 6 percent, its lowest since mid-2010.

Foreign bond holdings in Hungary are at a record high.

Budapest needs to refinance about $7.2 billion in bonds and $5.9 billion in IMF repayments this year, according to Reuters calculations based on national debt agency data.

If it can secure enough cash early on, that could last Orban until a 2014 election, giving him room to pursue pro-growth policies that the Fund disagrees with.

“One year ago it was true that an IMF loan would have been much cheaper, but this is less evident now,” said Gergely Szabo Forian, a fund manager for Pioneer Fund Management in Budapest.

“Fifteen months ahead of elections, we can put a strong bet on that there will be no IMF deal.”

Other countries may find a similar benefit. Slovenia is struggling to avoid becoming the euro zone’s next bailout victim. But if it can borrow 2 to 3 billion euros in 2013 on international markets, it can put those fears behind it for now.

“Our preference is, definitely given the market sentiment, sooner than later,” finance ministry State Secretary Dejan Krusec said this week in reference to an upcoming bond.

Serbia, a non-EU state struggling to overcome recession, is also looking for new lending sources after the IMF froze a 1 billion euro standby deal last year due to overspending.

It wants to borrow 4.5 billion euros in all in 2013, including issuing a 7-year Eurobond very soon.

The yield on 10-year bonds has fallen from 7.27 percent to 4.8 percent in the last year, a move Finance Minister Mladjan Dinkic chalked up to bullish investor sentiment towards the government’s fiscal consolidation efforts, but also easy global monetary conditions.

“We simply expect that this will continue to go down,” he told a Euromoney conference in Vienna this week.

“Lenders are looking for yield.”


The Czech Republic, too, is sounding out chances for a yen-denominated bond, and Romania is likely to go to foreign markets in the first quarter to cash in on a jump in demand that has propelled the leu currency to a one-year high.

But not all policymakers are pleased that easy global monetary conditions have triggered the hunt for higher returns.

Anna Suszynska, the deputy head of Poland’s debt department at the Finance Ministry, said weak global growth meant quantitative easing would stick around for a while yet.

But the ECB and U.S. Fed would eventually have to wind in their operations, which could create serious volatility in emerging European markets.

“This unorthodox policy the Fed has conducted ... and also the ECB, we believe it is a threat to the whole region,” she told the Euromoney conference.

“If this unorthodox policy stops, it means that very quickly bond (yields) will go up.”

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