Summit Notebook

Is emerging Europe out of the woods yet?

A surge in portfolio inflows is flooding into emerging central Europe, although yield-hungry investors are picking solid policy and higher growth over countries still struggling to put the crisis behind them.

After deep contractions across the region, a two-speed recovery is underway, with countries boasting better debt fundamentals like Poland and the Czech Republic for the moment ahead of those who depend on foreign lending.

Investors are also dipping into countries like Hungary, but struggles by the new centre-right Fidesz government to get its budget deficit under control mean it is lagging for now, along with fellow International Monetary Fund benefactor Romania.

“There has… been clear differentiation between the more robust and the weaker economies of the region,” Goldman Sachs wrote in a research note on the region.

“We believe that the region’s stronger economies — namely, Poland, Turkey, Israel and the Czech Republic — will be the first to see an acceleration in financial inflows both in debt and, increasingly, equity.” Turkey and Israel are often grouped with emerging European markets.

Extremely easy monetary policy in the world’s developing economies, including expectations the Fed will push ahead with more asset-buying, plus continued worries over debt in troubled euro zone countries like Greece and Ireland have helped push investors into these higher-yielding countries.

But these new, more volatile, portfolio flows carry risks.

Stop lumping us together! say Central Europeans

An invitation to the Reuters Central European Investment Summit may sound perfectly acceptable to many policy makers and executives but not to Czech central banker Mojmir Hampl. It’s not that he objected to visiting our Vienna office and being interviewed by a crew of editors — Hampl was ready and willing to do that. He just questioned the very idea of lumping together all the different countries in a very diverse region.

“I’m a bit disappointed that the key topic is how the Central and Eastern European region will develop,” Hampl told us, reviving a complaint often heard around the region. It’s a serious issue, one that has bothered many policy makers in central European countries, who grew frustrated at the height of the financial crisis that investors were not differentiating between those with sound fundamentals such as the Czech Republic and Poland and those on decidedly shakier ground.

“We’ve spent some time explaining the differences,” Hampl said, making little effort to disguise his irritation with the rest of the world’s tendency to think about central Europe as a homogeneous region. “If you look at the GDP per capita in PPP (purchasing price parity) terms…between the United States and Panama it’s not as huge as the GDP difference in PPP terms between Ukraine and Slovenia.”

Ludwik Sobolewski, head of the Warsaw Stock Exchange, struck a similar chord. ”In the second half of 2008 the Polish economy and stock exchange were treated very much as all other markets in our region…  We suffered a lot from this negative assessment of the region triggered by some countries we all remember… Ukraine, Hungary, the three Baltic states.”

The Nowotny-shaped recovery

By Petra Spescha

European economists have been nearly unanimous about what Europe’s recovery from the crisis will look like on a chart: L-shaped — a severe slump with a prolonged period of flat or minimal improvements in the economy.

But at the Reuters Central European Investment Summit Ewald Nowotny created a new shape when he tried to clarify a statement he made to an Austrian newspaper earlier this month about the economic turnaround.

Emerging Europe – what’s next?

Reuters Central European Investment Summit, September 28-30, 2009

The former Communist countries of central Europe have been the last to be hit by the global economic crisis, but th e hit they took was among the hardest. Only big neighbour Russia’s deep plunge into recession is rivaling the sharp fall from record economic growth that’s in store this year for the economies between the former Soviet Union and Western Europe.

Global risk aversion and deleveraging exposed the weaknesses that the countries had been able to gloss over during the boom years – which in retrospect appeared to have been, in some countries, a colossal binge bankrolled by cheap foreign credit extended by Western European banks that had to come to an end when funding dried up.

from Shop Talk:

Campbell Soup’s CEO steps up

Campbell Soup CEO Doug Conant, who spends his day selling soup, V8 vegetable juice and crackers, wrapped up his appearance at the Reuters Food Summit in Chicago with an exercise tip.

"Our lives are incredibly chaotic," said the 57-year-old CEO, who says he has found an easy way to step up his exercise and burn off calories from some of his favorite foods, such as Campbell's tomato rice soup and a grilled cheese sandwich made on his company's Pepperidge Farm bread.

"My assistant looks for a free half hour every day," said Conant, who is ready to lace up his sneakers when the moment is right. 

"Conant says he can get in 3,000 steps or more in a half hour.  Some studies suggest that 10,000 steps a day can help control weight.  But even if you fall below that, experts say any amount of exercise is good.

"It's a great way for busy people to get fit," he said.

(Photos: Campbell Soup, Reuters)

Where would you invest now?

Global markets are tanking, investors are hoarding cash and the financial crisis has hit central and Eastern Europe. Where do you run when the world is on fire?

We asked that very question — or a watered-down version of it, at least — to the executives and policymakers at this week’s Reuters Central European Investment Summit in Vienna.

The question was this: “If you had 10 million euros of your own money and had to invest it in any one thing in the region, from a small business to an asset fund, what would you do?”

I expected our Hungarian speaker, deputy central bank Governor Ferenc Karvalits, to give the question more thought.

After the huge selloff in Hungary’s debt, currency and stock markets this month, mainly due to concerns over the health of the country’s banking sector, including the largest bank OTP, I thought he would be hard pressed to think of a good investment.

But he didn’t hestiate.

“OTP,” he said. “Either that or contemporary art. Even though I heard the run on artwork has slowed.”

Central Europeans frown at state bank ownership

Talk in western Europe of possibly nationalising private banks to save them from the credit crisis is sending shivers down the spine of policymakers in ex-communist central Europe.

They remember how their government controlled financial systems completely collapsed in the 1990s and threatened to take the countries’ economies along with them due to pouring money into firms with little prospect of returning it.

“There are very strong attempts to nationalise banks, which, in my opinion, is a very short sighted approach,” Slovak central bank Vice-Governor Martin Barto told the Reuters Central European Investment Summit in Vienna this week.

He pointed to what he said was “very extensive experience with state owned banks” in Slovakia.

The Slovaks bought non-performing assets from state-controlled banks for over 100 billion Slovak crowns ($4.13 billion), or roughly around 12 percent of GDP, prior to their sale to western investors early this decade.

Polish Deputy Finance Minister was also unimpressed when asked about government ownership. “This is a very delicate issue particularly for countries in our region because 20 years ago banks were not private but public,” she said at the summit.

The central Europeans may shrug off the notion of nationalisation at least for now. Their banks, after being cleaned up and sold, have fed on domestic financial services growth in the past decade and have largely avoided the scraping for profit that forced western banks invest into highly leveraged assets that have turned sour.

Carbon fails to capture EU cash

The EU boasts of its global leadership in fighting climate change but some in the energy industry wonder whether the bloc will put money to work to cut greenhouse gas emissions.

EU governments have been reluctant to back clean technologies — such as carbon capture and storage (CCS) that could sharply reduce pollution from coal — with cash, potentially killing their future, Czech power utility CEZ told the Reuters Central European Investment Summit this week.

“I see a very big gap between the rhetoric of the EU representatives, saying it’s a number one priority of the EU and on the the hand zero commitment to put any funding behind (it),” CEZ sales chief Alan Svoboda said.

“There are billions of euros channelled into agriculture a year and zero goes to fighting CO2 on the R&D and technology side,” he said. “Without public money CCS will not be born.”

Perhaps after years of food piles and wine lakes, the EU doesn’t want to face a carbon mountain or a CO2 reservoir.

Will environment be forgotten in crisis? OMV says no.

There are some who say the economic downturn means ambitious plans to fight global warming should be put on ice.

But Wolfgang Ruttenstorfer, the head of Austrian oil and gas group OMV, reckons cutting carbon emissions is inevitable in the long run, despite the financial crisis and its impact. 

“I think the price signals of the last two years will not be forgotten by consumers and politicians and therefore the thrust towards renewables will continue, maybe at a slightly slower pace,” he told the Reuters Central European Investment Summit. 

For some, going green is a luxury in harder economic times: Poland and Italy aren’t too happy about European Union legislation to fight climate change and say it could hurt their economies at a time of slower growth.

The EU has stressed that climate plans will be affordable but as the worst financial crisis in 80 years continues to unfold there are doubts over whether there will be enough money or willpower to invest in cleaner energies.

“We stay committed,” Ruttenstorfer says. “We have our future energy fund and we will continue to work on this and definitely not put it on the shelf.”

OMV has been aiming to make its refining more environmentally-sound, to cut down on carbon dioxide emissions and is participating in pilot carbon capture projects. Cleaner gas-fired power plants are also seen as a good option by the company.

Audio – Part One: E.European economies have weathered credit crunch, but seen slowing – IMF

East European economies have weathered the global credit crunch so far, but they are becoming increasingly vulnerable and governments must tighten fiscal policy to avoid overheating, said Christoph Rosenberg, Senior Regional Representative Central Europe and Baltics at the IMF during his presentation at the Reuters Central European Investment Summit.

Recent events also highlighted downside risks for the region, said Rosenberg.

In its a report on the world economic outlook published on Wednesday, the IMF said it had revised downward all of its 2008 GDP forecasts for EU members in east Europe, with the exception of Lithuania which remained unchanged.

To read more from Rosenberg on eastern Europe, click here. If you want to read a story on the latest IMF report, click here.