Fitch warns of Debt spike in Central Europe

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Currencies: Czech FinMin is hedging Eurobond emission
Fixed Income: Fitch warns of Debt spike in Central Europe

Czech Republic

The Czech koruna was only little changed yesterday despite several interesting news items. First, Fitch kept the CR’s credit ratings and stable outlook unchanged but warned that the CR and other countries in the region risk a downgrade if their public finances are not consolidated. Fitch expects the country’s debt-to-GDP ratio to rise in 2010 to 40.8%, which we consider as a too pessimistic scenario. Secondly, the MinFin announced that it would hedge its proceeds from its EUR 300bn Eurobond issue (planned on November 30). And last but not least, a political debate about Finance Minister Jannota’s austerity package has continued. All the above mentioned information, however, had no impact on the market and EUR/CZK continued to move just above the 25.10 level.
We think the koruna will remain in a wait-and-see mode ahead tomorrow’s interesting core markets statistics and Thursday’s central bank meeting. Hence, the koruna will develop a sideways trading pattern, while ongoing bullish atmosphere in emerging market should eventual help the Czech currency to firm slightly.

As concerns the Czech yield curve its volatility has remained minimal. Like in Koruna’s case the fixed income market shrugged off both new information about the FinMin austerity package and Fitch warnings about regional sovereign rating. Hence, the only interesting development appeared in FRA market, where the rates unexpectedly jumped. We doubt this development is sustainable, especially ahead of the CNB meeting, which should bring firmly neutral outcome on Thursday

Hungary

The Hungarian forint started the week in a bearish mode and the pair touched the level of 273.00 in the morning session on Monday. The trend however did not last long after the USD began to weaken and stocks began to strengthen around midday and the forint was able to recover to 271.00 in the afternoon.
Global sentiment have been driving the forint these days and yesterday’s oil slump weakened the exchange rate only temporarily.

The Hungarian fixed income market was basically stable on Monday and yield levels remained unchanged. The Central bank’s rate meeting next week is attracting some attention from investors. The money market has priced in 50bps rate reduction for this month followed by another 50bps move in October, hence the interest rate game in Hungary could be interesting only for those who expect a bigger rate move than this or smaller one. In our view, the most likely scenario is a 50bps cut next week to 7.50% followed by 25bps steps each month thereafter.

Poland

The Polish zloty inched lower as the bulls has pulled out of the market in a lazy start to the week. Also the warning by rating agency Fitch did not help much the Zloty. Fitch forecasts the Polish debt to increase from 47% of GDP to 56.3% of GDP in 2010. The agency thinks that high budget deficit will prevent the Poles to adopt euro before 2013.
The pair got to as far 4.17 EUR/PLN, but does not seem to be willing to continue higher. The sentiment has turned positive during Asian trading and domestic outcome of core inflation should not change that much. Nevertheless the market should be cautious ahead of retail sales, important US figures and Fed meeting – all scheduled for later during the week.

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