Toxic Politics and Fading Stimulus: East Europe's 2019 Risks
Toxic Politics and Fading Stimulus: East European Risks in 2019
(Bloomberg) -- Traders in eastern Europe face a toxic landscape in 2019. In the twilight of the euro area’s monetary-stimulus program, populism is spreading and growth is slowing.
Cracks in the European Union look set to deepen as member states go to the polls in May, potentially inflaming the debate on investment funds in the bloc’s new budget. After a corruption scandal erupted at Poland’s financial regulator this year, the ruling Law & Justice party’s majority faces a test in November parliamentary elections. Geopolitics still dominate Russia’s markets, and the threat that a fresh round of U.S. sanctions may be deployed against the region’s largest economy hasn’t gone away.
On top of that, after almost four years of quantitative easing, the European Central Bank is edging closer to its first rate hike -- just as peers across the continent juggle inflationary pressure with headwinds from a slower global economy.
Sanctions Angst
Investors in Russia are girding for some kind of U.S. restrictions on sovereign debt or banks. The possibility of a damning conclusion from Special Counsel Robert Mueller’s investigation into Russian interference in the 2016 election could be a potential trigger for new penalties.
Orban’s Showdown
The ascending band of populist leaders in the EU’s east could turn the bloc’s elections into a battle between the new and old member states. Viktor Orban -- the populists’ unofficial leader -- hankers after a Europe of nation states, and the Hungarian Prime Minister dismisses criticism that his policies taint democratic norms.
In Poland, a judicial revamp has set it at loggerheads with the EU. General elections and a presidential race the following year may prove hotly contended amid the widening corruption scandal that pummeled bank stocks this year.
Exit ECB
ECB stimulus pushed billions of euros into higher-yielding eastern markets. Now it’s time for the punch bowl to be taken away. The likely end of the ECB’s net asset purchases this year and an expiring commitment to keep rates near zero may finally compel the region’s dovish central banks to pursue hikes of their own.
Poland is in the midst of a record rates pause, while Hungary still keeps borrowing costs near zero. Others are more advanced in their tightening cycle, with the Czech central bank raising rates already five times this year and Romania also lifting theirs.
The Oil Factor
Crude prices have dominated the news as the year draws to a close. Russia is protected from all but a nosedive in prices, given the breakeven price of around $40 per barrel factored into its budget. Lower prices and slower inflation are a boon for central banks in Hungary and Poland as it enables them to keep financing conditions loose for longer. They simultaneously curb the need for more tightening in Romania and the Czech Republic.
Budget Commitments
For all their fiery rhetoric slamming EU meddling, eastern member states are reliant on the bloc’s contributions to infrastructure projects. Receipts are already poised to fall because of Brexit and a switch of focus toward the Mediterranean nations battling stagnation and immigration, with any further reductions seen weakening the region’s economic outlook and dimming the appeal of their markets for investors.
Negotiations over the EU’s seven-year budget are never easy, but an initiative to tie some payments to a commitment to upholding democratic values may make it even more difficult to convince eastern member states to sign up. The talks are already delayed.
--With assistance from Áine Quinn.
To contact the reporters on this story: Marton Eder in Budapest at meder4@bloomberg.net;Adrian Krajewski in Warsaw at akrajewski4@bloomberg.net
To contact the editors responsible for this story: Dana El Baltaji at delbaltaji@bloomberg.net, Alex Nicholson, Andrew Langley
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