Latvia and Hungary: Start October headache

- "We see a troublesome threesome in emerging Europe, hidden below the current decent risk conditions and bond inflows to emerging market funds. Hungary, Latvia and Romania each have risks connecting fiscal, politics and elections. We wrote about Romania last week in “Metastable Equilibria” and the rising risks of early elections and disintegration of the cabinet. Now we look at the other two countries in a little more depth. However, these three countries and their respective domestic fiscal nd political stories can feed back on one another, and we believe this could develop into a more generalised regional sovereign risk story. This could well become important at the start of October with the Latvian parliamentary elections on the 2nd and then the Hungarian local elections on the 3rd."
- "This theme is particularly relevant as we move though H2 and towards next year as these countries are reaching the end of their IMF credit lines (October 2010 for Hungary, April 2011 for Latvia and May 2011 for Romania). More than that these countries face potential difficulties funding in the market under adverse risk conditions, and IMF repayments could add further difficulties down the line (although all have a significant proportion of IMF/EU aid still in reserve, drawing down reserves is not a good sign) although that will not start for another year or two. On top of this, we expect the market re-focus on the issue of peripheral Europe and how it will fare through 2011, and so any risk in CEE is likely to be associated with a corresponding country in western Europe. In particular Hungary is obviously linked via its banking system to Germany. Romania is linked to Greece and the rest of the periphery in both banking and export terms, while Latvia has its classic linkage to Sweden."
- "The Hungarian government has turned its back on the IMF/EU lending package and appears to have “got away with it” so far. Risk sentiment towards EM countries in general is positive and bond inflows have remained moderately supportive. In addition, some in the market believe that the government is on the right path. However, the risk that other governments (or opposition parties) try to force a similar anti-Brussels/Washington consensus line is being closely watched by the EU and we believe any such behaviour will be stamped out quickly in a flurry of rhetoric and if necessary warnings of likely consequences."
- "As ever with such events, markets are likely to be slow to react, in part because results will not be known for some time and also in the case of Latvia because coalition talks may well take a month or more. The speed of market reaction may well be influenced strongly by the degree of risk tolerance of markets in three and a half weeks’ time."

Nomura EEMEA View 20100917

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