Europe's next great convergence play?

  • 01 Apr 1999
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The prospect of European Union membership for selected countries in central and eastern Europe should not be seen as a catch-all safety net for investors and lenders.
There is still much that can go wrong politically and economically in the region, and in individual countries, and the need for detailed investment analysis is paramount.
But, as Guy Norton reports, EU accession is already changing the capital markets landscape in the region -- and the access of issuers in central and eastern Europe to international bond, loan and equity markets.

European Union officials watching the recent television coverage of Nato air strikes against Serbia could perhaps be forgiven for having momentary doubts about the wisdom of admitting states from central and eastern Europe into their cherished club.

At the same time, government ministers in central and eastern Europe reading the recent European Commission report detailing the corruption, fraud and mismanagement within the EU would only be human if they stopped to question whether the benefits of EU membership were not quite all they were cracked up to be.

But for better or worse -- and most observers believe it will be for the better -- the current round of enlargement, the fifth in the history of the European Union, is moving inexorably forward.

Already five countries -- the Czech Republic, Estonia, Hungary, Poland and Slovenia -- have begun detailed negotiations with the EU which should lead to membership in the period 2002-2005.

Five others -- Bulgaria, Latvia, Lithuania, Romania and Slovakia -- are all hoping to follow suit shortly, with Latvia, Lithuania and Slovakia widely expected to begin in-depth membership discussions at the end of this year.

Of the other central and eastern Europe states tipped as prospective EU membership candidates -- Albania, Croatia, Macedonia, Montenegro and Serbia -- Croatia is seen as having the best chance of securing an EU association agreement in the foreseeable future.

Immediately after the fall of the Berlin Wall 10 years ago the prospect of the former Communist, centrally controlled economies of central and eastern Europe being able to integrate themselves into the democratic, free market sphere of the European Union would have seemed a remote one.

But that is just what is happening -- and happening faster than even many of the most optimistic observers hoped it would.

Despite the many uncertainties that continue to surround EU accession -- not least the ability of the European Union to put its own house in order so that it can accommodate the new entrants -- one glaring fact stands out.

This is that the process will change the economic and capital markets landscape of central and eastern Europe forever and create a myriad investment opportunities for investors within and outside the region.

A recent ING Barings report EU Enlargement -- Investing in Convergence concludes: "The prospect of EU enlargement and the accession of countries in the region to the EU will be a dominant investment theme for markets in emerging Europe for the next decade and beyond."

True, the spectre of Russia's economic meltdown last August, which left investors of all types nursing heavy losses, continues to haunt the bond, equity and loan markets -- both those inside central and eastern Europe and those without.

But the EU-oriented policies of central and eastern Europe enabled the region to survive its stiffest economic test yet relatively unscathed.

From now on, this means that the region's economies are inextricably linked with those of the stable European Union rather than the potentially unstable Commonwealth of Independent States.

Even in the most ardent former Communist countries in the region, the mantra of the Maastricht criteria is now far more likely to be heard than the words of Marx and Lenin.

From the Adriatic to the Baltic governments are preaching the virtues of free market economics as they prepare for the challenges of EU membership -- privatising airlines, banks, power plants, telecom companies and other major utilities with all the zeal befitting their recent convert status.

The increasing number of state sell-offs will be aimed at international investors, and also at the growing audience of domestic institutions and private individuals willing to dabble in the erstwhile mysteries of share ownership and trading.

Wide-ranging pension reforms will ease the burden on stretched government finances over the coming years and create vast pools of capital that will boost the fortunes of the region's local equity markets -- and of the banks and brokerages that service them.

Domestic bond markets should also benefit from such inflows as well, which in turn is expected to attract greater international participation -- including investors, issuers and lead managers.

In the international bond markets, issues denominated in hitherto exotic currencies such as Czech korunas and Polish zlotys are already a regular feature of the Euromarkets -- and are seen as natural successors to former high yield currency plays in European legacy currencies such as Spanish pesetas and Italian lire.

In the credit spread markets, this year all the serious contenders for EU membership are expected to promote their credentials with sovereign bond issues in the euro -- which is set to be the national currency of most central and eastern European countries within the next 20 years.

Once rare and exotic borrowers abroad, central and eastern European sovereigns are now a more common sight -- raising increasing volumes of low cost funds in the international bond markets to bolster their drive towards EU membership.

The region's leading corporates are also branching out into the bond, medium-term note and commercial paper markets.

And, despite the traumas of the Russian crisis, which slashed the capacity of the banking market to fund the region's economic expansion, the best regarded borrowers from central and eastern Europe are already making a successful comeback in the international syndicated loan markets.

For all the economic progress and growth in international investment in the region, access to the international capital markets for central and eastern European borrowers is still vulnerable to external shocks.

The Republic of Hungary discovered this just three weeks ago when the escalation in the Kosovo crisis caused it to shelve plans for a $750m global bond issue, the first from the region.

But the fact that Hungary managed to get the deal done just two weeks later (albeit at a reduced size of $500m), at a time of such regional uncertainty, speaks volumes for the growing faith of investors in selected central and eastern European countries -- and to the increasing view that EU accession will fundamentally change the risk-return characteristics of this increasingly diverse region. EW

  • 01 Apr 1999

All International Bonds

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • 24 Oct 2016
1 JPMorgan 317,793.98 1355 8.72%
2 Citi 301,114.13 1092 8.26%
3 Barclays 259,580.63 846 7.12%
4 Bank of America Merrill Lynch 258,842.43 934 7.10%
5 HSBC 224,273.23 905 6.15%

Bookrunners of All Syndicated Loans EMEA

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • 25 Oct 2016
1 JPMorgan 32,854.00 58 6.73%
2 BNP Paribas 31,678.29 142 6.49%
3 UniCredit 31,604.22 138 6.47%
4 HSBC 25,798.87 114 5.29%
5 ING 21,769.65 121 4.46%

Bookrunners of all EMEA ECM Issuance

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • 25 Oct 2016
1 JPMorgan 14,633.71 80 10.23%
2 Goldman Sachs 11,731.14 63 8.20%
3 Morgan Stanley 9,435.23 48 6.60%
4 Bank of America Merrill Lynch 9,229.95 42 6.45%
5 UBS 8,781.68 42 6.14%