Draghi Bond Buying More Welcome in East Europe Than Switzerland

(Bloomberg) — Unlike in Switzerland, eastern Europe has reasons to cheer Mario Draghi’s bond-buying push.

Policy makers from Poland to Hungary meet Tuesday in Vienna for a conference, two days before the European Central Bank is due to discuss monetary stimulus that may trigger inflows into currencies such as the Swiss franc. For eastern Europe, the move may help keep deflation at bay and economic growth ticking over, trumping the risk of asset bubbles, bankers and analysts from London to Prague say.

ECB bond buying would “clearly be a positive,” said Piroska Nagy, an economist at the London-based European Bank for Reconstruction and Development, which has invested to rebuild the region since communism fell. “Monetary easing can have a positive impact on the economies that are linked to the zone conducting this policy.”

While most eastern European countries don’t yet use the euro, they stand to gain as ECB stimulus encourages cross-border lending and bolsters growth in the currency bloc, their main trading partner. Policy makers in the region are already busy dealing with the withdrawal of stimulus in the U.S. and the Swiss National Bank’s shock decision to end its currency cap, which has raised debt costs for franc mortgage holders.

Currencies weakened last week in Poland and Hungary, the nations with the highest share of home loans denominated in francs. The zloty and the forint are both down 0.7 percent against the euro this year.

Looser Policy

While Europe’s east has so far weathered the euro area’s economic slowdown, the plunge in oil prices has stoked downward price pressure, leaving Poland and Hungary in deflation and nearby nations with record-low inflation rates.

ECB stimulus may let the continent’s east keep borrowing costs at record lows and in some cases cut them further, bolstering economic growth, according to Neil Shearing, chief emerging-markets economist at Capital Economics Ltd. in London.

“Policy in central and eastern Europe is going to remain looser than would otherwise be the case,” he said by phone. Poland and Romania may cut rates further, while the Czech Republic could adjust its cap on koruna appreciation, he said.

Additional liquidity from the ECB may also spur western European lenders, which own about two-thirds of eastern Europe’s banking industry through companies including Erste Group Bank AG and Societe Generale SA, to slow the pace at which they withdraw capital from the region, according to Shearing. ECB bond-buying would bolster confidence across the entire continent, he said.

Draghi’s initiative does hold risks for eastern Europe.

Side Effects

Borrowing costs that exceed the ECB’s create the risk of capital inflows and asset bubbles in bond markets, Polish central bank Governor Marek Belka said last week. Poland left its benchmark at 2 percent last week. The Frankfurt-based ECB will review its 0.05 percent rate on Jan. 22.

Poland has so far avoided the by-products of “ultra- loose” policy by global central banks by intervening to show “the zloty isn’t a one-way bet,” Belka said.

Another risk is that the ECB doesn’t go as far as investors have already priced into eastern European asset prices, said Helena Horska, head of research at Raiffeisenbank AS in Prague. “If the ECB’s steps aren’t on the expected scale, there will be a disappointment” and the impact on central and eastern Europe will be negative because of the region’s dependence on the euro area, she said Jan. 15 by phone.

Economic growth will probably remain robust regardless, as cheaper energy prices swell disposable incomes, according to the EBRD. Central Europe and the three Baltic countries will grow 2.6 percent this year, while southeastern Europe will expand 2.2 percent, the London-based lender said Monday in a report.

Momentum in these groups will be “sustained, supported by domestic demand and lower commodity import bills,” it said.

To contact the reporters on this story: Agnes Lovasz in London at [e-mail]; Lenka Ponikelska in Prague at [e-mail] To contact the editors responsible for this story: Balazs Penz at [e-mail] Andrew Langley