1. Outlook for external financing of the public sector in Southeast Europe
Dubravko Mihaljek
Bank for International Settlements
Presentation at the Bank of Greece – University of Oxford (SEESOX) Conference
Achieving sustainable growth in Southeast Europe: Macroeconomic policies, structural reforms, socio-political support and a sound financial system
Athens, 11 February 2011
The views expressed in this presentation are those of the author and not necessarily those of the BIS.

2. Outline Global portfolio capital flows
Advanced economies vs. emerging markets
Emerging market regions
Central and eastern / Southeast Europe
Cross-border financing (bank lending and international bonds)
Emerging markets
Central and eastern Europe
Conclusion

3. Global portfolio capital flows
Advanced economies vs. emerging markets
Post-crisis portfolio inflows to EMEs peaked in Q3-Q4:2010
Jan-Feb 2011: shift to advanced economies, EM equity fund outflows strongest since 2008
Concerns: EM equity valuations, EM inflation, developments in Northern Africa
Why advanced economies?
Mostly US equities – positive growth and earnings surprises in Q4:2010
But also Australia, Japan, Italy and Spain

5. Portfolio capital flows (cont’d)
Emerging market regions (data through 2 Feb 2011)
Inflows peaked in October 2010
Sharp slowdown of portfolio inflows to emerging Asia and Latin America in Dec 2010–Jan 2011
Week from 26 Jan to 2 Feb 2011 – strongest outflows from equity funds to Asia in three years
Steady flows into CEE through January, but net outflows in the week from 26 Jan to 2 Feb 2011
Growth and interest rate differentials still likely to favour Asia and Latin America in 2011

7. Rising inflation – one reason why portfolio inflows to Asia are reversing

8. Equity prices declining, local currency bond yields rising as a result of higher inflation in emerging Asia

9. Portfolio capital flows (cont’d)
Central and eastern Europe – larger economies
Portfolio inflows peaked in Oct 2010
In central Europe, mostly flows into bond funds (especially Poland)
In Russia and Turkey, mostly flows into equity funds
Turkey – similar pattern of capital flows as emerging Asia and Latin America (decoupling from CEE?)
Russia – benefitting from rising oil prices

11. Portfolio capital flows (cont’d)
Southeast Europe
Pattern of inflows differs from other emerging markets, CEE
Much smaller inflows than to other CEE countries
Mostly inflows into bond funds
Some evidence of spillovers from Greece in 2010

13. Cross-border banking flows
Resumption of cross-border bank lending to emerging Asia and Latin America in 2010: Q1–Q3 inflows exceeded pre-crisis (full-year) peak from 2007
Bank lending to CEE was the last to recover among EM regions (Q3:2010 vs. Q3:2009 in Asia)
Some slowdown in bank lending to Asia, increase to Latin America and CEE in Q3:2010
Bank lending to CEE unlikely to recover to pre-crisis peaks → Not surprising, inflows before the crisis were not sustainable (26% of gross inflows of private capital to EMEs in 2006, vs. only 11% of EMEs’ GDP)

15. Cross-border financing of CEE economies
Very slow recovery in cross-border bank lending
Still no cross-border bank lending to Southeast Europe in Q3:2010
Cross-border lending to banks resumed on a larger scale only in Albania, Croatia, FYR Macedonia and Turkey
…and to the non-bank sector only in Bulgaria and Croatia
(Note: lending to the “non-bank” sector includes the public sector)

16. Cross-border lending to CEE during the crisis

19. Cross-border financing of CEE economies (cont’d)
International bond financing more resilient – despite the crisis, many CEE countries placed sovereign bonds in 2009 and 2010
But this came at a price: bond and CDS spreads remain quite high and fairly volatile
FX reserves position of several countries weakened in 2010
But coverage of short-term debt by FX reserves mostly good in SEE

23. Conclusion
Uncertainty about prospects for external financing of public sector in SEE:
Global capital flows no longer favouring emerging markets as in But still to early to see the trend
Within emerging Europe, SEE not a focus of international investors (except Turkey)
Resumption of cross-border lending very slow
International bond issuance more reliable – but costly – source of public sector external financing
FX reserves buffer generally seems adequate