The Economy

Debunking Decoupling

Financial fallout in the west is hitting emerging markets in the east.
Gabor TaroczyDecember 8, 2008

Last month, Fitch Ratings degraded the sovereign debt of Hungary, Romania, Bulgaria and Kazakhstan. The move put paid to the theory of “decoupling,” at least for now. Few still cling to the idea that the fallout from wobbly markets in the west will bypass emerging markets in the east.

For western companies that hoped to tap fast-growing markets in central and eastern Europe (CEE), this is unwelcome news. Martin Grüll, CFO of Raiffeisen International, a Vienna-based financial services group that operates in 15 countries across Europe’s eastern fringe, says that his company is “being punished for what we had previously been praised: being a CEE pure play.”

Manfred Wimmer, CFO of Erste Bank, another Austrian bank with extensive exposure to CEE, notes that his company, like Raiffeisen, recently halted Swiss franc loans in the region. The rapid depreciation of CEE currencies — the Hungarian forint in particular — has put borrowers who were attracted to the lower interest rates on these loans under strain.

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Erste Bank continues euro-based lending in the region, hoping to sustain “people’s confidence by giving them access to credit,” Wimmer says. He hopes that the crisis will encourage CEE’s EU members to seek to join the euro zone more quickly. Of course, existing members will require deep structural reforms before letting others into the club. “There is a clear risk of the situation getting further out of hand,” warned analysts from Danske Bank in a recent report. “The need for international crisis management in CEE is rising day by day.”