The contagion from the single-currency debacle continues to spread into Central and Eastern Europe, with the regions average score falling by 1.2 points this year, on the heels of a 2.9 point fall in the second half of 2011.
Some 19 of the CEE regions 25 countries have been downgraded by ECR contributors during the last six months. For many countries, bank-stability risks have become more acute against the backdrop of weaker economies, the disintegration of cross-border ties fuelled by the eurozone crisis and interbank lending constraints. Increased capital and funding requirements imposed on parent banks in Europe are also constraining flows of externally funded credit into the region.
The benefits of eurozone membership for Slovenia, Estonia, Cyprus and Malta, until recently taken for granted, are now beginning to come under closer scrutiny from ECR contributors. All four are among the countries experiencing large falls in their ECR scores during the last six months, albeit for varying reasons. While the economic outlook has become more of a concern for Estonia, Malta and Slovenia since January, Cyprus has seen its government finances and institutional risk scores decline.
Bank stability has only become more of a concern for Slovenia its score for that particular sub-factor has fallen by 0.6 to 5.6 and Cyprus (a 0.1 point fall to 5.7), as ECR experts have taken stock of contagion possibilities and the threat of increased loan-losses in those countries. Corruption, an underlying problem for Malta, is adding to its risks, while for Estonia its institutions and information access/transparency are perceived to be more of a threat.
Hungary, the regions worst performer, has fallen 5.2 points to 49.1, plunging 10 places in the global rankings to 67. Economists have responded to the governments stalling programme of fiscal consolidation complicated by a weak economy, currency depreciation and a delayed agreement with multilateral lenders by downgrading the country across 10 of the surveys 15 indicators since January.
The borrower has slipped below 12 other sovereigns, including not only Croatia, Bulgaria and Portugal, but also India, Russia and Indonesia. Its credit default swap was trading at 510bp in early July, similar to the level seen in Italy.
Further east, Tajikistan, Ukraine and Kyrgyz Republic, along with Russia and FYR Macedonia, have all seen the largest mark downs in their economic assessment scores in reaction to the fading external environment.