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Pros Say: ECB Should Help Eastern Europe

CNBC.com
Friday, 10 Apr 2009 | 1:34 AM ET

Reports that the IMF suggested that Eastern European countries should adopt the euro as soon as possible to solve their current account deficit and exchange rate problems have been dismissed by some experts.

Pros explain why the European Central Bank should help the region but doesn’t just yet, and what are the risks in Central and Eastern Europe.

Eastern Europe and the Euro

"In terms of central and eastern Europe, they have a particular problem which everybody is a bit scared to touch really," Beat Siegenthaler from TD Securities said. Adopting the euro by the 8 new members "needs the ECB to be on board, to work. The countries themselves cannot really come forward and say 'okay, now we adopt the euro unilaterally' – that doesn't work."

Relaxing the Rules for Adopting the Euro?

Agata Urbanska from ING Wholesale Banking is skeptical of reports that the IMF has suggested relaxing rules for struggling eastern European countries to join the euro zone.

Hungary Risks Downgrade to Junk Status

"It is a difficult downgrade because if S&P or any other ratings agency decides to downgrade Hungary further, there will be a lot of pressure on bonds holders, on bond funds to sell their bonds. Probably equity funds will face the same problem," Zsolt Papp from KBC said after S&P cut the country's long-term foreign and local currency rating to BBB-, one notch above junk status.

"Hungary will face a much bigger task to raise money in capital markets. Right now Hungary is not there but if it ever had the intention to go back to capital markets in the near future, I would say that door is closed right now," he told CNBC.

"In looking at all the indicators, debt to GDP data, deficit to GDP data, a risk of a downgrade is quite significant in my view," Papp added.

'Hungary's Solvency is Secured'

"This government started to take very tough measures when the crisis hit Hungary," Gordon Bajnal, Hungarian Minister for Development & Economy, said after Hungary's prime minister resigned last week.

"What we have to realize, and that's behind the prime minister's resignation, that we need to build a wider support, not just a minority government but a majority support in parliament to go further and to do more," he told CNBC.

"Hungary's solvency, as a government, is pretty much secured. Hungary has received a ($) 20 billion standby loan facility from the IMF and the EU, and in addition the National Bank of Hungary has ($) 17 billion in reserve," Bajnal added.

E. Europe's Problem is Worse Than Subprime

Eastern Europe's problem is a greater weight on Western European nations than sub-prime is on the U.S., believes Jeffrey Halley, senior manager, FX trading at Saxo Capital Markets.

E. Europe, a Financial Tinderbox

"The IMF balance sheet today can support about $150 billion worth of lending – that's hardly enough to get through part of central and eastern Europe. The recapitalization there has to be significant," Larry Hatheway from UBS said Monday ahead of the G20 summit. "The IMF needs at least a half a trillion dollars worth of balance sheet resources to address that region, as well as potential issues that may arise elsewhere."

"If an IMF agreement cannot be found this week, the next financial tinderbox is central and eastern Europe and that is the area we have to be most concerned about."

Eastern Europe Faces Debt Pressure

Countries in Eastern Europe with refinancing pressure will eventually have to tap their foreign exchange reserves and maybe even the IMF, Luis Costa from Commerzbank told CNBC.

Fears in Eastern Europe Overblown?

"Most of these countries just need a lot of financial capital during the next couple of years because of the huge debt they accumulated," Janis Huber from DekaBank said of the situation regarding eastern European countries.

Are the Crisis Fears Overblown?

Eastern and Central Europe are suffering from a "triple whammy effect," Peter Attard Montalto from Nomura told CNBC. "Slowing export demand, reversal of investment inflows, and sell-offs of currency” are all impacting the region's economy, he said.

Emerging Asia Offers Opportunities

Don't paint then entire emerging market universe with the brush stroke. While Eastern Europe may look like its in trouble, things look much better in Asia, Roman Podkolzine, product specialist at BNP Paribas Investment Partners said.

G20 Good for Emerging Markets

Agreements from the G20 leaders are generally better-than-expected for emerging markets, Guy Verberne from Fortis Bank Netherlands, Merchant Banking, told CNBC.

Flags of member states of the European Union.
Armando Franca
Flags of member states of the European Union.

Is the EU Doing Enough to Aid its Members?

"There is no final decision on whether there will be an extension on the EU emergency fund, we have to work on this," Kinga Goncz, Hungary's Foreign Minister told CNBC. She also gave insight on whether the EU is doing enough to help struggling European economies.

EU Has to Take Responsibility for the Future

"It is important to send a clear message that we will be responsible for fiscal policy and the we would also do what we can to mend the problems in the world economy," Anders Borg, Sweden's Finance Minister told CNBC. He elaborated on the role of the European Union.

Bailing Out Eastern Europe

There's no doubt that Germany and France will need to bail out Eastern Europe, says David Roche, global strategist at Independent Strategy Ltd. But it is likely to be done in conjunction with the IMF and World Bank.

Bank of Hungary Holds Rates Steady

"Letting the currency (Hungarian forint) depreciate more would risk serious problems for the banking system, and it's not like Hungary has money to bail them out," Bartosz Pawlowski from TD Securities said after Hungarian interest rates were left on hold Monday.

E. European Currency Slump Coming

Eastern European currencies need to fall by between 25% and 30% to provide the basis for a recovery, Roger Nightingale from Pointon York told CNBC Monday. Such a slump is likely to occur, Nightingale added.

More Euro Weakness in the Near Term

Concerns about Western European banks exposure to Eastern European economies will continue to weigh on the euro in the near term, notes Emmanuel Ng, currency economist at OCBC Bank.

Forex Markets Driven by Risk Aversion

John Noonan, senior FX analyst with Thomson Reuters, says the tension in forex markets is shifting to the Eastern European debt crisis, where Western European banks have huge exposure. He discusses the factors that drive currency trading this week.

Nordic Banks Take Strain on E. Europe Exposure

Nordic banks, especially Swedish banks, are in trouble due to their exposure to high risk Eastern European and Baltic markets, according to Christian Blaabjerg from Saxo Bank. He sees Swedish banks writing down a further $9.1 billion.

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