Eastern Europe into Abyss: Will Also Eurozone Be Sucked into It?
TURMOIL OVER EAST EUROPE
By Stefan Wagstyl in London, Alan Beattie in Washington, and Aline van Duyn in New York
Fears of banking upheavals in eastern Europe and the potential fallout on western Europe yesterday triggered widespread turmoil in global financial markets.
Sharp declines in east European equities and currencies prompted drops in west European bourses and the euro as investors fled for the safety of bonds, the US dollar and gold.
The turmoil was prompted by a report from Moody’s, the credit rating agency, which warned that west European banks with east European subsidiaries risked rating downgrades because of the growing vulnerability of eastern Europe’s banking systems. Standard & Poor’s, a rival agency, later issued a similar caution.
This raised fears that the European economy as a whole could suffer from the deepening difficulties of those east European states that are struggling to raise credit for their debt-financed economies and of those western European banks that have long been the region’s main source of funds.
“This is reminiscent of the Asian crisis of 1998,” said Michael Wang, an emerging market strategist at Morgan Stanley, the investment bank.
“We are seeing what used to happen in emerging markets, where during the years of global expansion countries borrowed heavily and built up large external imbalances, only to face downward pressure on currencies and growth once the cycle turned and foreign capital inflows dried up.”
The euro fell 1.5 per cent to a two-month low of $1.2599 against the US dollar. The Swedish krona fared even worse, falling 2.7 per cent to SKr8.7815 against the dollar. The Polish zloty slumped to a five-year low of 4.93 zlotys against the euro, prompting Donald Tusk, the prime minister, to say the government may sell euros if the zloty fell to 5 against the euro – the first time Warsaw has published an exchange rate floor. The Hungarian forint fell to a record low of Ft309.60 and the Czech koruna, the Romanian leu and the Russian rouble were all down.
Polish and Czech shares dropped to their lowest level in five years, while other equity markets in the region came under pressure.
In Moscow, trading was temporarily suspended amid sharp price drops, provoked partly by the government cutting its 2009 economic forecast from a contraction of 0.2 per cent to one of 2.2 per cent.
The turmoil in eastern Europe spread west, with much attention focused on banks with east European operations.
Italy’s Unicredit closed 7.3 per cent lower. In Austria, Raiffeisen International plunged 13.5 per cent and Erste fell 18 per cent.
Global investor sentiment was dented by a US report showing manufacturing activity in the New York region sliding to a record low in February.
The S&P 500 had fallen 4.2 per cent by late afternoon trading to 792.53, the first time it has fallen below the 800 level since November, while the FTSE Eurofirst 300 index shed 2.5 per cent.
Government bonds rallied, with the yield on the 10-year US Treasury sliding 20 basis points to 2.69 per cent and the 10-year German Bund yield falling 5bp to 2.99 per cent.
Gold hit a seven-month high above $970 an ounce.
Additional reporting by Adrian Cox, Miles Johnson, Dave Shellock and Peter Garnham in London, Jan Cienski in Warsaw and Thomas Escritt in Bucharest