Post by radovic on Nov 21, 2007 13:42:12 GMT -5
Bulgaria: Peg risk in Bulgaria - Citigroup report
EMonline
Analysts in Citigroup Global Markets report examine the risk of exchange rate crisis in Bulgaria, Estonia, Lithuania and Latvia.
One underlying problem with these economies, which Citigroup analysts call the CB4, is that their growth cycles are closely tied to the level of capital inflows, at a time when there are reasons to doubt the sustainability of those inflows.
Analysts examine these risks in the context of Argentina’s 2001 crisis. One lesson seems to be that the path to devaluation might be a long one, since a recession would be needed first in order for the markets to make a judgement about whether the Currency Boards' 'automatic adjustment mechanism' will actually work.
Peg risk in emerging Europe could become a critical issue in the coming months if expectations about European growth continue to fall, since this would be a likely trigger for a more cautious approach to balance sheet management by European banks; and a decline in the CB4’s ability to export their way out of their imbalances.
The imbalances that analysts have discussed are most evident in Latvia, where signs of overheating are more obvious than in the rest of the CB4, and where – unlike Bulgaria – FDI inflows have been particularly weak compared with the financing needs produced by the current account deficit.
Given the nature of contagion, however, it is likely that exchange rate pressure in Latvia would transfer to some other countries if they were perceived to have similar kinds of vulnerability. This contagion would be directed towards Estonia, Lithuania and Bulgaria.
Although Bulgaria’s vulnerabilities are similar in some respects to those of the Baltics, Bulgaria has a number of advantages over the other three, particularly because i) inflows of FDI to Bulgaria have been quite large, limiting the accumulation of debt-creating liabilities; and ii) it has been the most successful of the four in increasing its economic integration with the rest of the EU.
That said, exchange rate risk in Bulgaria cannot be discounted for two reasons to do with the nature of Currency Boards in emerging economies. The first is that Currency Boards establish a very close link between a country’s growth rate and the volume of capital flows. And second: currency over-valuation with a rigid exchange rate regime is a difficult problem to solve. If weak eurozone growth helps convince markets that an overvaluation problem exists, contagion risks could be maximised. ('Peg risk' in Emerging Europe- report )
EMonline
Analysts in Citigroup Global Markets report examine the risk of exchange rate crisis in Bulgaria, Estonia, Lithuania and Latvia.
One underlying problem with these economies, which Citigroup analysts call the CB4, is that their growth cycles are closely tied to the level of capital inflows, at a time when there are reasons to doubt the sustainability of those inflows.
Analysts examine these risks in the context of Argentina’s 2001 crisis. One lesson seems to be that the path to devaluation might be a long one, since a recession would be needed first in order for the markets to make a judgement about whether the Currency Boards' 'automatic adjustment mechanism' will actually work.
Peg risk in emerging Europe could become a critical issue in the coming months if expectations about European growth continue to fall, since this would be a likely trigger for a more cautious approach to balance sheet management by European banks; and a decline in the CB4’s ability to export their way out of their imbalances.
The imbalances that analysts have discussed are most evident in Latvia, where signs of overheating are more obvious than in the rest of the CB4, and where – unlike Bulgaria – FDI inflows have been particularly weak compared with the financing needs produced by the current account deficit.
Given the nature of contagion, however, it is likely that exchange rate pressure in Latvia would transfer to some other countries if they were perceived to have similar kinds of vulnerability. This contagion would be directed towards Estonia, Lithuania and Bulgaria.
Although Bulgaria’s vulnerabilities are similar in some respects to those of the Baltics, Bulgaria has a number of advantages over the other three, particularly because i) inflows of FDI to Bulgaria have been quite large, limiting the accumulation of debt-creating liabilities; and ii) it has been the most successful of the four in increasing its economic integration with the rest of the EU.
That said, exchange rate risk in Bulgaria cannot be discounted for two reasons to do with the nature of Currency Boards in emerging economies. The first is that Currency Boards establish a very close link between a country’s growth rate and the volume of capital flows. And second: currency over-valuation with a rigid exchange rate regime is a difficult problem to solve. If weak eurozone growth helps convince markets that an overvaluation problem exists, contagion risks could be maximised. ('Peg risk' in Emerging Europe- report )