Growth prospects good for Eastern Europe

VILNIUS - Western European government bonds are riskier than emerging-market debt for the first time as investors brace for 1.1 trillion U.S. dollars of borrowings from euro-region countries this year, reports Bloomberg. “Concerns about the periphery are dragging down Western Europe,” said Harpreet Parhar, a strategist at Credit Agricole in London. “Emerging markets have solid growth stories and are not directly weighed down by peripheral issues,” the expert pointed out.

Europe’s developing nations will grow 3.1 percent this year, according to forecasts by the International Monetary Fund. That’s more than double the 1.5 percent eurozone expansion shown in a Bloomberg survey of economists.
Credit-default swaps on junk-rated Ukraine and Romania are among the world’s best-performing government-linked contracts in the last three months, while Greece, Ireland and Spain are the worst performing, CMA prices show. Investors are shunning the debt of countries including Spain and Portugal as austerity measures fail to reassure bondholders that they can meet their obligations.

Swaps on Ireland, which agreed to an 85 billion euro rescue package last quarter, rose to a record 640 basis points (6.4 percent) last week, CMA prices show. That is up from 448 basis points on Oct. 7, and means it costs 640,000 dollars annually to insure ten million dollars of debt for five years.

Swaps on Greece rose 273 basis points to 1,023 in the past three months, and Spain increased 120 to 346. Ukraine fell 37.5 to 474.5, while Romania dropped 21.5 to 295.5, CMA prices show.

Ireland will this year post the widest deficit in the EU at 10.3 percent of gross domestic product, following 2010’s 32.3 percent, according to the European Commission. Some Irish banks’ bonds are no longer accepted as loan collateral by the Swiss National Bank after Moody’s Investors Service lowered the country’s credit rating by five levels, to Baa1, on Dec. 17.
“People are still wary that issues remain unresolved in the financial sector,” said Christian Weber, an analyst at UniCredit in Munich. “That weighs on national budgets and poses a risk to the solvency of peripheral countries.”

Portugal, which intends to sell as much as 20 billion euros in bonds to finance its budget and redemptions this year, sold 500 million euros of bills with a yield of 3.686 percent on Jan. 5, up from 2.045 percent at a sale of similar maturity securities in September. Swaps on Portugal cost 517.5 basis points, near the Nov. 30 record of 543.

Countries such as Bulgaria, Lithuania and Kazakhstan are faring better than their advanced neighbors because they have less debt and avoided the plunge in real estate prices that plagued the West.
“Emerging markets as a group weathered the global recession better than advanced economies. Many have seen growth bounce back during the past year, and they seem poised for high growth in coming years,” the IMF wrote in a report published on its Web site last month.

The MSCI Emerging Markets Index of stocks gained 16 percent in 2010, beating the 8.6 percent increase for Europe’s Dow Jones Stoxx 600 Index and the 12.8 percent gain by the Standard & Poor’s 500 Index in the U.S.
Developing European governments were most affected by contagion from the sovereign debt crisis, the IMF said. Countries in the Middle East and Africa, which are also included in Markit Group Ltd.’s CEEMEA index, fared better.

That index has declined 11 basis points, to 206, since it started trading on Jan. 20, 2010, CMA prices show. Markit’s Western Europe index rose 129 basis points to 213 in the same period. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.