By Balazs Koranyi
BUDAPEST, Feb 19 (Reuters) - Romania rejected all bids in a
3-year bond offer on Thursday and Hungary said it may stay away
from the bond market until June as the credit crunch bit deeper
into already reeling markets in central and Eastern Europe.
Tight credit markets could force governments to begin a
tough and likely painful fiscal adjustment or could lead to
further weakness by the region's already ailing currencies.
Debt prices went into freefall this week when already gloomy
sentiment spiked due to worsening growth prospects and rating
agency reports that the strain on the region's banks may
threaten not only their own ratings but their parents' as well.
Romania accepted no bids at a 200 million lei ($59 million)
3-year bond offer. Analysts said banks had probably pushed for
yields around 15.5 percent after the European Bank for
Reconstruction and Development issued 50 million lei of two-year
bonds at that level but that the ministry considered too high.
At a previous Dec. 18 sale, average yield was 13 percent.
Hungary, with one of the region's most wobbly markets, said
it may not try to tap markets before June. A 12-month bill sale
saw yields surge by two percentage points from two weeks ago.
That followed a tender on Wednesday in which the Czech
Republic placed less than half of the 10 billion crowns offered
in an 8-year, floating rate auction.
"The near future doesn't hold anything good for these
markets," KBC Chief Economist Zsolt Papp said. "This is much
more due to poor sentiment than fundamentals, even though
fundamentals are also poor."
Some economists have warned that the Western banks that are
emerging Europe's main finance pipeline may have already started
pulling back from financing in the region, which has seen rapid
growth screech to a halt in the economic crisis.
Governments and companies have already faced stricter
borrowing requirements, and banks have warned of a drop-off in
mortgage and consumer lending.
A further tightening of lending conditions could exacerbate
an already sharp drop in growth, worsen an already record drop
in the region's currencies and put pressure on the European
Union to craft a rescue package for Central Europe, particularly
its banks, analysts said.
"In our view the most likely scenario is that the EU will
have to step in to stabilise the situation," Danske Bank's Lars
Christensen said in a note.
FISCAL CHOICES
Governments have held off on debt issues and delayed euro
bonds but mounting financing needs are becoming more onerous as
the price of debt skyrockets and the prospect of default rises.
UBS estimates that Poland has around 70.9 billion euros
worth of short-term external debt, Romania 27.9 billion euros,
the Czech Republic has 28.4 billion and Hungary 24 billion, all
of which need to be covered.
Five-year credit default swaps in Hungary, which averted
financial collapse last year with a $25.1 billion International
Monetary Fund-led rescue package, have jumped to 549 basis
points on Thursday from 430 basis points in January.
Romania said on Thursday said that its 6-10 billion euros
external financing need may be to be financed with IMF help. Its
CDS spread has jumped to 745 basis points, from 645 at the start
of the year.
Some analysts warn against putting too much emphasis on CDS
figures as they represent counterparty risk thus may be skewed,
but Hungarian 5-year bond yields are more than a 1,000 basis
points above similar German paper.
"Of the liquid markets, Hungary is the most vulnerable
because its assessment for years has been the worst and it's
difficult to get out of this spiral," KBC's Papp said.
"Investors don't think Hungary's in the danger of defaulting
but think that unless major changes occur soon, this could
happen."
Domestic markets may provide short-term financing but
analysts said that could also change.
"The danger is that domestic funds will no longer be willing
to buy bonds," KBC's Papp said. "This may already be happening
is Hungary ... and we're not too far from that in Poland."
The problem could put more pressure on Hungary's forint,
Romania's leu and Poland's zloty -- all near record lows --
until governments adjust fiscal policies. If they do not,
currency weakness may force them, said Reinhard Cluse, from UBS.
"There's no way we can manage this without pain... There are
tough choices to be made," he said.
(Reporting by Balazs Koranyi; Editing by Toby Chopra)
