Market update - it looks like a meltdown
Overnight the sell-off in Central and Eastern European markets accelerated further after Moody's announced that it may downgrade Swedish and Austrian banks with exposure to Central and Eastern Europe. This move will further exacerbate concerns over the state of CEE economies and markets.
The region's large imbalances and significant currency mismatch has long been a problem for us and there is no doubt that the CEE countries can expect a very sharp drop in economic activity. Despite already depreciating substantially, we see no reason why the sell-off of CEE currencies should cease soon absent substantial intervention from the EU and/or the ECB to support markets. We think it unlikely that local authorities will be able to muster sufficient resources to curb the sell-off in CEE currencies in the present environment. To us this looks like a market meltdown on the same scale as occurred during the Asian crisis of 1997. No currency in the region will be unaffected by this. Doubtless the markets have decided that the CEE region is the subprime area of Europe and now everybody is running for the door. In addition, it is not just regional currencies that are under pressure. Stock markets are also being sold off with yields and rates beginning to rise significantly. Furthermore, Credit Default Swaps have risen dramatically across the region during the last couple of weeks.
