CEE Macroeconomic and Fixed Income Research

Analysts’ view

HR Macro: Yesterday, the National Bank of Croatia issued a release concerning the recent developments in CHF mortgages. A few things are important to highlight: i) the data confirms that FX positions were closely matched i.e. no speculative behaviour from banks ii) compared to a conversion to EUR-linked loans (where there would be no impact on the FX rate), the cost of a conversion to local currency is estimated at more than 70% of FX reserves if the Government opts to convert both EUR and CHF housing loans to HRK. We treat this as a strong signal from the side of monetary policy that a conversion to local currency would hit macroeconomic stability and the Central Bank would prefer to seek a solution in an alternative debt relief scheme. In our view, if the Government does decide to press ahead with a conversion, the EUR-linked solution remains the more likely option. Consequently, our EUR/HRK outlook remains unaltered at the moment and we forecast EURHRK moving in a 7.70-7.75 band in 1Q, before starting to reverse as the customary seasonal pattern kicks in.

PL Macro: Another positive surprise came from the real economy this month as industrial output growth reached 8.4% y/y in December, a strong rebound from a meager 0.3% y/y growth rate seen in November that pushed the zloty to slightly higher levels. The better than expected data makes it easier for the hawks to defend their preferred “wait and see” approach. In combination with increased volatility on the FX market, we believe a rate cut in February is rather unlikely and Osiatynski, who believes, that the cut should be delivered rather sooner than later, will be in minority. The delayed rate cut, and the ECB likely announcing the QE program, support a somewhat stronger zloty. At this moment, we maintain our forecast of EURPLN at 4.19 at the end of 1Q14, sticking with our view of PLN appreciation.

Traders’ Comments:

CEE Fixed Income: So, the cat’s out of the bag and the market reaction is underwhelming. News was leaked ahead of today’s scheduled ECB press conference that QE will total EUR 1.1 trn over 2 years with government bond purchases amounting to EUR 50 bn per month. Mario Draghi still has to confirm that the Governing Council supported the plan but there is little space for a real market-moving positive shock unless the Council also approved mutualisation of the debt which is highly unlikely. Elsewhere, but no less important, Bloomberg writes “Greece’s opposition Syriza leader Alexis Tsipras said his party will respect European Union fiscal rules and commit to targets on eliminating the deficit, in a further olive branch to the country’s creditors as he moves closer to winning power“, which essentially removes a big threat to the system so the focus should shift quite quickly to the effectiveness of QE to avert deflation. If it’s successful, bond yields in our region should rise and currencies strengthen but that still looks a long way off. The most pressing question at the moment revolves around FX debt and its impact on consumer confidence and bank balance sheets. For growth prospects to pick up, Europe needs a strong banking system but QE doesn’t solve that problem. It’s more likely to result in a tightening of spreads amongst sovereigns and a weakening of currencies in the short term. However, recent turbulence has had a big impact on prices already, especially on financials so it’s really a question of what has already been priced in and Moody’s announcement yesterday that it had miscalculated Austrian bank exposure to CEE FX debt gave a boost to those opportunistic local investors who had been scooping up some bashed down bank bonds. Barclays has picked up on these developments and published research highlighting the historically high spreads between Austrian covered and senior bank bonds.