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April 2009 | ifr special report | SP3 SOVEREIGNS Two tier system

The global recession has created severe budgetary distress across Central and Eastern Europe. The fiscal crisis has been met with differing responses as better regarded sovereigns access international markets to help meet their shortfalls while high beta names are forced to seek assistance from multilateral agencies like the IMF. Mike Winfield and John Weavers report.


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mong all the central and eastern European economies, Triple A-rated Austria is by far the best regarded. However, it has

been severely impacted via its exposure to its eastern neighbours, more so than other EU states due to the relatively small size of its domestic economy and the resultant exposure of its banking system. The sovereign has seen its 10-year bond spread widen from plus 40bp to a peak at plus 128bp over Bunds between last autumn and February 2009. While this hasn't particularly hampered the ability of Austria to fund itself internationally, it has clearly had a negative impact on the cost of funding. Typically, Austria makes relatively infrequent recourse to the capital markets and often appears early on the calendar

with the first of its syndicated deals. 2009 was no different with a €3bn long five-year issue sold at 15bp over mid-swaps in January, with a further deal yet to be announced later in the year. In addition to its syndicated issues,

Austria relies on monthly auctions of its outstanding debt, adding almost €1.8bn to its 3.9% July 2020 bond in February. The suggestion in February by German finance minister Peer Steinbrueck, that Europe as a whole would eventually bail out the weaker member states was enough to create a short-covering rally which led to a spread tightening of all Eurozone member states. This benefitted Austria and the other euro-based economies such as Slovenia (Aa2/AA/AA) which has also been able to access the capital market this year with a €1bn three-year benchmark deal at mid- swaps plus 165bp.

Slovenia, which has been a star performer among the new EU members, anticipates a domestic demand-led recovery in 2010, which should bring average growth back up to 2%. Despite this serious slowdown, it expects to remain one of the EMU's top achievers in terms of GDP growth. A country of around 2m people, Slovenia has modest 2009 borrowing re- quirements of just €2.8bn, of which €800m will be financed in the short-term market with €2bn of longer-dated financing. Like all sovereigns, Slovenia has seen its

differential to German debt widen, although as a shorter dated issuer (typically three or five-years), the fall in absolute interest rate levels since last year has in part offset this additional cost. The situation of the Czech Republic and Poland is somewhat different: these economies are not yet using the single currency and have had additional funding requirements imposed by the devaluation

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