Safe from sub-prime crisis

IF THE world financial market has the flu, the Slovak market only has a mild cold.

IF THE world financial market has the flu, the Slovak market only has a mild cold.

That's because Slovakia's immune system is partially boosted by recently launched investments, muscular economic growth and the fact that the region's banks weren't heavily invested in US securities covered by sub-prime mortgages. However, if the US economy sinks into recession and its major European partners follow, Slovakia will be affected as well, market watchers said.

What started as turmoil contained to the American mortgage market has now grown into a global concern that resulted in European markets recording on January 21 their heaviest losses since the 9/11 terrorist attacks.

On January 22, the US Fed made the deepest interest rate cut in the last 25 years to help markets recover. However, market players and watchers remain worried that the help may be too late.

"What impact the US mortgage crisis has on Slovakia's economy depends on whether it affects the US economy, and especially, that of EU countries," Jana Kováčová, spokeswoman of the National Bank of Slovakia, told The Slovak Spectator. "However, we do not expect it to have a significant impact on Slovakia."

Unlike banks in other European Union countries, Slovak banking houses won't experience a lack of liquidity in the short term, since domestic banks do not significantly depend on interbank market financing, Kováčová said. On the other hand, considering world market developments, an impact on the price of long-term money can be expected, she added.

Given the edginess of financial markets, according to Kováčová, an impact on mutual and pension funds invested on the markets affected by the crisis cannot be ruled out.

However, the share of investments into pension funds directly plugged into the American crisis is very small, which means that the value of pension fund units should not dip considerably, Kováčová added.

The National Bank of Slovakia assumes that the uncertainty of world real estate markets will most likely have a measurable impact on the Slovak real estate market.

"The volume of investments by foreign companies into the Slovak real estate market might drop," Kováčová said. "Domestic banks might become more reserved when financing real estate projects."

Market watchers said that the Slovak foreign exchange market instantly reacted to the European stock exchange market tremble, but calmed after the Fed cut the interest rate.

"The Slovak crown was one of the first currencies in the region to weaken, slipping by 3 percent, but regained its footing by 1 percent," Ján Tóth, chief analyst with ING Bank, told The Slovak Spectator. "But the currency is still relatively unstable."

Silvia Čechovičová of ČSOB Bank said that the Slovak market reacted to the crisis only indirectly through the Slovak crown, which along with other currencies in the region, cracked under pressure, and has exceeded a 34 SKK/EUR exchange rate.

"The growing aversion towards risk and the plunge of global markets certainly does not bode well for the Slovak crown," Čechovičová told The Slovak Spectator. "On the other hand, after the US central bank cut interest rates by 75 basis points, the situation calmed down and the crown has regained some of its previous losses, returning to under 34 SKK/EUR."

Mária Valachyová, senior analyst with Slovenská Sporiteľňa, said that the crown has been weakned by the falling euro, im the same way the euro has been weakened by the dollar.

"The developments reflect concerns that the US economic slowdown might be more widespread than had been expected a couple of months ago and that it might slow economic growth in Europe as well," Valachyová told The Slovak Spectator.

However, apart from the momentary fluctuations on financial markets, market watchers do not expect a fundamental impact on the Slovak economy, Valachyová said.

"Slovakia currently has a well-driven economy and at the same time we do not expect the demand from our EU business partners to considerably drop," Valachyová said.

Valachyová does not expect the banking sector to encounter serious problems either, because Central European banks have sufficient liquidity.

The Slovak banks are unlikely to suffer losses similar to those of American banking houses, since neither Slovak banking houses nor their foreign mother companies have invested in securities covered by sub-prime mortgages, she said.

"At the same time, banking houses in Central Europe provide loans in a way different from methods used by US banks," Valachyová said.

In the United States, loans are provided through a third party (mediator) that isn't as cautious about whether the client can afford it, according to Valachyová. But in Slovakia, banks bear the responsibility for proving a clients' solvency.

Čechovičová agrees that the crisis won't have a considerable impact on Slovakia's economy in the short term.

"If the US economy sinks into recession, which is what that the markets worry will happen, it will have an impact on the economy of the eurozone and, subsequently, Slovakia," she added. "Most probably, it would contribute to the slowdown of economic growth, since Slovakia's largest partners are from the eurozone."

On the other hand, the Slovak economy might remain immune to a certain degree due to the recent start of production in new plants, she said. Even so, some slowdown could still occur, she added.

Though market watchers assume a moderate slowdown will occur within the European economy, they do not expect the European Central Bank to cut interest rates to the degree the Fed did in the United States.

Interest rates in Slovakia are likely to remain at the current level in the coming months, Valachyová said.

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