The decision of American investment bank Merrill Lynch to recall a $35 million loan to Slovak industrial giant VSŽ has been a major embarrassment to the company's senior management. And yet, as bad as it looks for VSŽ, the Merrill Lynch move had as much to do with global financial market trends as with confidence in the east-Slovak steelmaker.
Around the world, large investment banks are pulling out of emerging markets like Slovakia. Shocked and chastened by financial crashes in Asia (1997) and Russia (1998), banks are currently trying to reduce their 'exposure' - the amount of credit they have extended - in eastern European and Latin American countries. Not only are loans being recalled, but staff and even entire branch offices are being written off to protect profit margins.
"Some of these banks will never officially announce [what they are doing]," said Martin Kabát, an analyst with Slávia Capital brokers. "Instead, they would rather cut two thirds of their staff and turn the [regional] office into a simple means of staying in contact with the region." Among the foreign banks engaged in such cutbacks Kábat cited Merrill Lynch, the Japanese bank Daiwa and the American Bankers Trust, which has actually closed its office in Russia.
Ján Chodák, a banking analyst with CA IB Securities, said that full impact of the international crises on banking behaviour had taken months to unfold. "At the time [of the 1997 Asian crash] it seemed that it wouldn't have a global influence," he said. "However, it became a global trend when the Russian financial crisis followed. This has naturally hit emerging markets."
According to Chodák, any country whose Gross Domestic Product is lower than $8,000 per capita qualifies as an 'emerging market'. In practical terms, such countries are often undergoing a transformation process and are characterised by unstable economies and high inflation rates.
"In the case of Slovakia, financial markets first began losing trust in December 1997, when foreign rating agencies announced the possibility that Slovakia's ratings would be cut," explained Kabát. Moody's, one of the world's foremost ratings agencies, dropped Slovakia from an investment rating to a speculative level in March, a move followed by the respected Standard & Poor's group in September.
Chodák noted, however, that the ratings cuts were not carved in stone. "Some of the countries of this region have regained the trust of the banks," he said. "Since October, the situation has stabilized in Hungary and Poland - capital market indexes have risen, although credit offers have not yet responded in kind."
Ellen Lederman, vice president of J. P. Morgan in Prague, agreed that the rehabilitation of the Slovak image depended on the steps taken by the country's new government, but added that the process would be a long one. "Despite [the government's] hard work, and the will they have shown since their installation, the process of re-building the trust of foreign banks won't begin sooner than nine months from now," she said.
Chodák seconded Lederman's words of caution. "I am not optimistic that banks will return soon to emerging markets," he said. "It may happen sometime around the middle of next year, but no one can be sure."
If anything could lure investment back to the country, Chodák explained, it was a chance to buy into attractive state-owned companies that remained in the government portfolio. On November 20, parliament passed an amendment to the Law on Strategic Companies allowing Slovak Telecom (ST) to be transformed into a joint-stock company as of January 1, 1999.
Chodák said that ST stock would prove to be one of the few interesting issues on the small Slovak market. "ST will probably raise the interest of foreign investors in this region," he said. "The privatisation of ST is one of the best signals towards foreign investors," agreed J.P. Morgan's Lederman.
30. Nov 1998 at 0:00 | Slavomír Danko