CEE Macroeconomic and Fixed Income Research

Analysts’ View:

Looking Ahead in CEE This Week: This week is going to be a short one as Friday is a national holiday in CEE countries, while the week is also scarce on macro releases and the calendar is virtually empty today in CEE. For the remaining three days, it is mostly the former Yugoslav countries that will report macro releases but we do not believe that the markets will be too bothered about these releases. The news flow from Greece and news about growth prospects in the euro area are more likely to be in focus on CEE markets. In addition, perhaps last week’s news from Hungary that the government intends to cut taxes as of 2016 will have further repercussions this week. Additional news about the exact plans for the easing package which will slash budgetary revenues by some 0.6% of GDP could be forthcoming, given that the government wants to draft the 2016 budget for approval by Parliament unusually early: already before the start of the summer season, which means quite soon. (A more detailed assessment of the announcements made last week can be found in last Wednesday’s daily.)

Traders’ Comments:

CEE Fixed income: Bleeding deposits and unable to access ECB’s regular financing operations while the bailout review remains stalled, Greek lenders currently rely on a EUR 75.5 bn ELA lifeline. The Governing Council of the European Central Bank is expected to debate on May 6th whether to raise the haircut on Greek collateral posted against Emergency Liquidity Assistance, the same day that Greece needs to find EUR 200 m for an International Monetary Fund payment. With support for the ruling Syriza Party now falling to 46% according to the most recent polls, any reduction of the value of collateral that Greek banks pledge may mean the days of ELA are numbered, further increasing pressure on the government to make a choice between complying with creditors’ demands or imposing capital controls, neither of which is going to go down well with the electorate. That said Syriza still appears to be leading the main opposition party New Democracy which opens the door to snap elections and a new mandate from the electorate. In a nutshell, the Greek drama will not go away overnight. CEE fixed income has largely been a spectator to Greek events and performance has been mixed; POLGBs and ROMGBs ended last week with higher yields and steeper curves whilst HGBs and CROATEs went in the opposite direction, but everything looks largely contained with w-w moves restricted to a range of -10 to + 16 bps. There is, however, one market which is under undeniable pressure and that is Turkey. The yield on the TURKGB 8% 25 is at the far end of the 3 month range, shooting up from 6.8% to 9.19% over that timeframe. Turkey is expected to be impacted much more by Fed policy than other markets in our region and even though the FOMC is not expected to hike rates this week, it seems only a question of when not if. On top of that, Turkey is grappling with its own internal problems which are compounded by President Erdogan’s tendency to openly criticise the CBT.