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New Europe Weekly

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Balkan politics − uncertainty on the rise

Fri, Jul 3 2009, 13:25 GMT
by Lars Christensen

Danske Bank A/S

This week the Croat Prime Minister Ivo Sanader announced that he is retiring from politics. This adds to the political uncertainty in Croatia and increases doubts about the implementation of fiscal authority measures. Political uncertainty is also on the rise on Bulgaria, where parliamentarian elections will be held on Sunday.

Sanader’s resignation was a complete surprise and raises a lot of questions - especially regarding Croatia’s aspirations to join the EU and the prospect of fiscal reforms. Overall we think that Sanader has been instrumental in EU negotiations and in the economic reforms – as such his resignation is bad news.

The risk of early elections in Croatia has clearly risen and we believe that Sanader’s party, the centre-rightist HDZ, could face defeat if early elections were to be held. Furthermore, some commentators have suggested that the HDZ might become less pro-European under a new leadership. This would all be bad news for the Croatian economy.

The Croatian economy is in the midst of a sharp economic downturn and it cannot be ruled out that it would have to seek help from the IMF. Furthermore, we would not rule out that Croatia will be downgraded by one or more rating agencies.

Sanader’s resignation brings the number of Prime Ministers in Central and Eastern Europe losing their job this year to four.

In Bulgaria political uncertainty is on the rise as well before the elections on Sunday. The opinion polls indicate it will be a close race between the governing Socialists (and their coalition partners) and the centre-rightist GERB party. GERB under the leadership of Sofia mayor Boyko Borisov, who has campaigned on anti-corruption plank, is likely to become the largest party after the elections, but the opinion polls indicate that GERB will be unable to rule without the support from other centre-right parties. If a GERB-led centre-right government were to be formed after the elections we think it would be welcomed by the EU and investors alike and as such would be positive for the Bulgarian markets.

A new government faces very serious challenges and during the election campaign even the governing Socialists have indicated that a new government would have to turn to the IMF for help. Furthermore, the budget situation is deteriorating significantly in Bulgaria as the economy is heading for a deep recession. Therefore, a newly elected government is likely to have to implement serious budgetary reforms – whether or not the new government turns to the IMF.

There are some concerns that it could take a while to form a new government after the elections and this could postpone badly needed reforms – both in terms of fiscal policy and the judicial reforms to fight organised crime and corruption.

Concluding, both Croatia and Bulgaria are facing more political uncertainty and this uncertainty might postpone fiscal reforms, which could add to market jitters in both countries.

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Published on  Fri, Jul 3 2009, 13:36 GMT