(The following statement was released by the ratings agency)
May 14 - Fitch Ratings says in a special report published
today that the global financial crisis has left those countries
in central and eastern Europe (CEE) that have substantial
current account deficits (CADs), maturing external payments and
foreign currency (FX) debt on private sector balance sheets
with a challenging external financing outlook.
"The reduced availability of global capital flows and risk
appetite makes a correction of excessive current account
deficits and a severe recession inevitable in most CEE
countries," says Edward Parker, Head of Emerging Europe
Sovereigns at Fitch. "Countries with the largest imbalances,
external repayment burdens and foreign currency debt on balance
sheets are the most vulnerable to external financing risks.
These include the Baltic and Balkan States as well as Hungary,
while the Czech Republic and Poland are the least exposed."
The new report brings together information on external
imbalances, the composition and payment schedules on external
debt, and FX exposures, and makes base line projections for
CADs and roll-over rates on external debt to analyse external
financing risk and potential gaps facing the Czech Republic,
Hungary, Poland, Estonia, Latvia, Lithuania, Bulgaria, Romania,
Croatia, Macedonia and Serbia.
Lower global capital flows mean countries face a challenge
in financing and unwinding unsustainable CADs. Although this
process is underway, the global recession and fixed exchange
rates, where applicable, will make it difficult to rebalance
and recover through export growth, which was the 'release
valve' in the Asian crisis. Therefore most countries face a
severe contraction of domestic demand and GDP. Fitch views this
"current account rebalancing risk" as greatest for countries
with the largest imbalances and lowest capacity to adjust
(including those with exchange rate pegs). This includes
Bulgaria, Latvia, Lithuania, Romania and Serbia. The Czech
Republic is the least exposed.
Although exchange rate devaluation can support
macroeconomic rebalancing, there is a risk it could precipitate
financial instability if a country has sizeable FX debt on its
balance sheets. Borrowers with un-hedged FX debt would face
problems meeting obligations and banks would face elevated
credit losses. Such concerns could create a negative feedback
loop to net capital inflows. Countries with high net external
debt and/or bank lending in FX are most vulnerable to this
"foreign currency risk". These include Bulgaria, Estonia,
Hungary and Latvia. The Czech Republic and Poland are the least
exposed.
Countries in CEE face a "gross external financing risk"
from not only financing CADs, but also from refinancing
existing maturing medium- and long-term and short-term external
debt. Fitch estimates these are over 300% of foreign exchange
reserves for Estonia and Latvia, and over 200% for Lithuania.
Only in the Czech Republic is the ratio below 100%. A vital
factor partly mitigating gross external financing risk in CEE
is that a high proportion of debt is owed to foreign parent
banks and companies, increasing the likelihood of high
roll-over rates rather than a sudden stop to capital inflows.
Nevertheless, the scale of external financing needs means
Fitch believes there is a reasonable likelihood that Bulgaria,
Croatia and Lithuania will seek IMF-led programmes to help meet
potential financing gaps and give breathing space for necessary
adjustment to take place. Hungary, Latvia and Romania have
already secured such programmes and Serbia is negotiating one.
"The increased firepower of the IMF, supported by other
international financial institutions and the EU, and action to
'bail-in' western parent banks is playing a vital role in
supporting banking systems, external finances and ratings in
the region, and should help forestall a severe region wide
financial crisis," says Mr Parker.
As the report sets out, CEE is not a homogenous region and
it is important to differentiate between countries within it.
Since the onset of the credit crunch in August 2007, Fitch has
downgraded the Long-term Foreign Currency Issuer Default
Ratings of Bulgaria, Estonia (by two notches), Hungary, Latvia
(by four notches), Lithuania (by three notches) and Romania (by
two notches); while the only upgrade has been the Czech
Republic. Seven of the countries are on Negative Outlooks
(Bulgaria, Estonia, Hungary, Latvia, Lithuania, Romania and
Serbia); while no countries are on Positive Outlooks.
The full report, entitled "External Financing Risks in
Central and Eastern Europe", is available on the agency's
subscription website at www.fitchresearch.com.
