Mammoth Lakes, CA (PRWEB) April 4, 2004
Interest rate convergence between Poland, Hungary and the E.U. has reversed according to a California-based independent investment research firm. Investors are generally unaware of the negative impact such a reversal will have on assets in Poland and Hungary, says Jeph Gundzik, president of Condor Advisers, an eight-year-old investment consulting company based in Mammoth Lakes, California.
ÂConvergence trades, driven by the May 1 E.U. accession of several former Soviet-bloc countries, has made international and domestic bonds in Poland and Hungary extremely expensive,Â Gundzik says. Gundzik, publisher of a monthly newsletter analyzing investment risk in emerging markets, says the very high prices of Polish and Hungarian international and domestic bonds donÂt reflect high investment risk, particularly in Poland.
According to Gundzik, among the countries that will join the E.U. on May 1, PolandÂs political and social risks are the highest. Underlying these risks are political instability, recently demonstrated by Prime Minister Leszek MillerÂs decision to resign, and failing popular support for his center-right coalition government. Rapidly rising popular support for leftist political parties, and the growing probability of the coalitionÂs collapse, suggests that a radical change in government policy is imminent in Poland. This will lead to larger fiscal deficits and rapid growth of the public sector debt stock over the next two years.
PolandÂs general government deficit, which was equivalent to 4.4 percent of GDP in 2003, is expected to increase to 5.7 percent of GDP this year and 6.5 percent of GDP in 2005. As a result, PolandÂs public sector debt stock is expected to exceed 65 percent of GDP in 2005. In addition to the growing fiscal deficit, slowing domestic demand growth and budding deflation are pushing the public sector debt stock higher. ÂIt will be almost impossible for Poland to avoid breeching its constitutionally mandated debt ceiling in 2005,Â says Gundzik. If the public sector debt stock exceeds 60 percent of GDP, PolandÂs constitution requires that the countryÂs budget generate a surplus the following year.
According to Gundzik, once PolandÂs dire fiscal situation becomes apparent a confidence crisis is likely to develop leading to rapid capital flight. ÂThe ratio of foreign portfolio investment to foreign exchange reserves is almost 70 percent in Poland,Â he says. Capital flight from Poland could easily trigger capital flight from Hungary, which has a similarly weak fiscal position. ÂThe ratio of foreign portfolio investment to foreign exchange reserves in Hungary is about 170 percent. A confidence crisis in Poland could easily trigger a confidence crisis in Hungary, leading prices to collapse for both countriesÂ bonds as well as sharp currency depreciation.Â
Condor Advisers, a Mammoth Lakes, California-based consulting firm specializing in emerging markets investment risk analysis, has been serving institutional investors globally since 1995. CondorÂs research has foreseen all the major crises in emerging markets, including the Asian liquidity crisis in 1997, RussiaÂs default and devaluation in 1998, BrazilÂs devaluation in 1999 and ArgentinaÂs default and devaluation in 2001. Jeph Gundzik is available to speak to the media about global political and economic trends, and investment risk and opportunities in emerging markets. He can be reached in the United States at 760-937-7152 or by email at email@example.com For more information please visit http://www.condoradvisers.com.
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