November 27, 2009 May 3, 2010

NovemberMay 27, 3, 20102009

This is bne's central Europe daily newsletter, a list of the top stories from the region. You can receive the list as a plain text or html email or as a pdf file. Manage your delivery options here: http://businessneweurope.eu/users/subs.php

TOP STORIES CREDIT 1. CBR Cuts 25bp ñ Cautiously Hints at End to Easing 2. PIGS-crisis will reach Central-Europe - UniCredit 3. Russian 'BBBs': Expensive Or Not? 4. Slow Recovery Ahead for Emerging Europe and Central Asia 5. Southern European debt markets have entered panic mode 6. Contagion risks seen greatest in Bulgaria, Romania and Hungary 7. EU27 Feb industrial new orders rise by 1.1% vs Jan 8. Forint and leu most at risk from Greek contagion 9. S&P downgrades Greece to speculative level 10. Greece downgrade doesn't derail equity and bond fund inflows 11. How does the latest IMF economic outlook tally with Erste GDP forecasts? 12. Sovereign bond issuers tough out Greek drama 13. The uncertainty caused by the Greek crisis is spreading. 14. VISEGRAD: Worst days behind emerging Europe, but then so are best 15. Watch the credibility gap in Europe 16. World Bank sees slow recovery ahead for Emerging Europe and Central Asia RUSSIA macro news 17. 1Q10 Russian GDP growth reported at 4.5%; NEUTRAL 18. April inflation may decline to 0.4-0.5% 19. CBR drives monetary aggregates via FX interventions 20. Customs duties to decrease gradually 21. Government proposes reducing amount of tax-deductable interest on corporate foreign debt 22. Interest rates returned to pre-crisis levels in March 23. MinEconomy presents new economic forecasts for 2010-13 24. Money supply expands 32.1% y_o_y in March 25. Official sees no further cuts in refinancing rate till September 26. Recovery in trade flows continued in Q4 of 2009 and into 2010 27. Russia impacted the most by Greece Downgrade 28. Russia won't replenish reserve fund in 2010 29. Russia's fedl budget deficit at RUB169.5bn January-February 30. Russia, China set to organize yuan, ruble exchange trading RUSSIA bonds 31. Alfa-Bank: FY09 results review 32. Alliance Oil Company to offer bonds totaling RUB20bn 33. Gazprombank can place Eurobonds in autumn 34. HCFB sets coupon rate for RUB5bn bonds at 9% 35. Mechel says fully placed RUB5bn exchange bond

36. MTS repurchases RUB 7.1bn of its bond issue 37. Russia's Sverdlovsk Reg to offer RUB3bn bonds in 2010 38. Sberbank to place Eurobonds in May 39. TMK reports FY09 results; expects a better 2010 40. VEB places $1bn domestic foreign currency-denominated bonds RUSSIA loans 41. Gazprom took out $367mn loan from Citibank in February 42. North Ossetia receives RUB1.47bn loan from VTB Bank 43. Tatneft long-term debt increases 78% in 2009 44. VTB may extend Ukrainian Finance Ministry $500mn RUS RATINGS 45. Alfa MTN Issuance Ltd. $600 Million 8% Senior Notes Due March 18, 2015, Rated 'B+' 46. Moody's assigns Baa1 rating to Russia's new Eurobond 47. Moody's withdraws Krai of Krasnodar's (Russia) ratings 48. Russian Corporation of Nanotechnologies Outlook Revised To Stable On Strong Ongoing Support; Affirmed At 'BB+/B/ruAA+' 49. Russian Irkutsk Oblast Outlook Now Positive On Possible Higher Revenues And Improved Market Sentiment; Affirmed At 'B' 50. Russian Tomsk Oblast Upgraded To 'B/ruA-' On Anticipated Debt Reduction, Moderate Budgetary Performance; Outlook Pos 51. Russian Yamal-Nenets Autonomous Okrug Now Investment Grade At 'BBB- /ruAAA'; Outlook Stable UKRAINE RATINGS 52. Fitch rates Privatbank's upcoming Eurobond B KAZAKH RATINGS 53. Fitch Assigns Kazatomprom's Notes Expected 'BBB-' Rating 54. Fitch changes Tristan Oil's rating watch to ‘Evolving’ from ‘Negative’ 55. Fitch: Servicing Concerns of Kazakh MBS Expose Risks in EMEA SF 56. Moody's assigns (P)Baa3 rating to the Notes of Kazatomprom 57. Moody's confirms KTZ's and Kaztemirtrans' ratings; outlook stable CE RATINGS 58. Fitch: EMEA Corporate Rating Stabilisation Trend to Continue into Q210 59. Fitch says EMEA CDO Outlook Negative despite Slower Credit Deterioration 60. Moody's Takes Negative Rating Actions on Greek Structured Finance Transactions 61. Republic of Hungary Ratings Currently Unaffected By Election Result, But Creditworthiness Could Benefit Over Time 62. S&P has raised CME's rating to 'B' from 'B-' SE RATINGS 63. Bulgarian City of Stara Zagora Downgraded To 'BB' On Deteriorated Liquidity Position; Outlook Negative 64. Bulgarian City of Varna Downgraded To 'BB' On Increased Debt And Pronounced Drop In Liquidity; Outlook Stable 65. Greece Long- And Short-Term Ratings Lowered To 'BB+/B'; Outlook Negative; '4' Recovery Rating Assigned To Sovereign Debt 66. Greek Bank Ratings Lowered Following Sovereign Downgrade; Outlook Negative UKRAINE CREDIT 67. Budget draft for 2010 in line with IMF conditions 68. Sovereign Eurobond in the pipeline for June 69. The next step after the budget is the resumption of the IMF loan 70. Ukraine adopts 2010 budget More realistic, but still very ambitious 71. Current account runs $0.2bn deficit in March 72. Deputy PM comments on prospective program with IMF 73. Dnipropetrovsk's rush retailer to float bonds worth UAH4mn 74. Ferrexpo may issue debut Eurobonds in 2010 75. Financial account posts $1.3bn surplus in March 76. Fitch assigns ëB-í ratings to upcoming Privatbankís Eurobond issue 77. Gov't proposes higher excise taxes on alcohol and gasoline 78. IFC approves up to $75m in loans for Mriya Agro Holding 79. IMF delegation may visit Ukraine in May to discuss loan program 80. IMF notes progress in loan talks with Ukraine 81. Metinvest starts Eurobond roadshow 82. MHP floats new eurobonds worth $330mn with 9.87% interest 83. Mriya attracted financing from the IFC 84. OVGZ placement: NBUís reserve requirement proves effective 85. OVGZ placement: yields at previous auction's levels 86. Real wages up 5.7% y/y in 1Q10 87. Ukraine C/A runs $0.2bn deficit in March 88. Ukraine's financial account (F/A) posted a $1.3bn surplus in March, reversing from February's $0.6bn gap and bringing its 1Q10 balance to -$0.6bn. (NBU) 89. VAB Bank posts 1Q10 net loss of $13m 90. XXI Century capitalizes US$ 14mn Eurobond interest payment KAZAKHSTAN CREDIT 91. Kazatomprom to sell its first Eurobond 92. Amsterdam Trade Bank may claim Almaty International Airport collateral for unpaid debts 93. GDP grows by 6.6 percent in Q1 94. Kazakh money supply increases 1.4% MoM, 14.4% YoY to US$52.7bn in March 95. Korean Shinhan Bank to help KMG EP raise $500 million EURASIA CREDIT 96. Armenia: EurAsian Development Bank to provide a $20mln loan to ArmBusinessBank 97. Armenia: In Q1 2010 nominal effective AMD rate rose by 3.3% 98. Azerbaijan: CB Notes placement results 99. Azerbaijan: CGB placement 100. Georgia: Debtor Registry Records Grow 1.7 times for a Month and Half 101. Tajikistan to see 5%-6% GDP growth annually in 2010-2012 102. Tajikistan: Money wires contribute one-third to Tajikistan's 6.8% GDP growth in Q1 103. Tajikistan: Rakhmon forecasts 5-6% economic growth in near term BELARUS CREDIT 104. Belagroprombank to borrow $800m from abroad this year CE CREDIT 105. Political attacks on central bank chief could lead to a halt of the easing cycle 106. Baltics says Greece must copy their model to ease fiscal crisis 107. Ciech signs debt refinancing agreement 108. Retail sales jump and sentiment strengthens 109. Czech central bankers make dovish comments 110. Czech economy seen growing a moderate 1.5% in 2010 111. Czech elections - potential government coalitions 112. Czech FinMin said to suggest govt should take higher dividends from state firms 113. Czech FinMin to propose more austerity measures for this year's budget 114. Czech govt urged to cut deficit as Greek drama unfolds 115. Czech pension system deficit to reach EUR1.38bn 116. Czech rates seen at bottom and will stay there until Q3 117. Eurostat Confirms Estonian Govt Deficit in 2009 at 1.7% of GDP 118. Estonia Retail Sales Decline In March 119. Estonian Industrial Output Grew Most in 3 Years on Exports 120. Germany opposes the European Union's plan to supervise national budgets more 121. Fitch, S&P await details of Fidesz's reforms that could affect Hungary rating 122. Hungarian central bank decided to cut rates by another 25bp 123. Hungarians give Fidesz a clear mandate... to do what? 124. Hungary after the elections 125. Hungary cuts interest rates again as Fidesz secures two-thirds majority 126. Hungary Fidesz calls again for central bank chief to resign 127. Hungary is changing 128. Hungary's unemployment rate jumped to 11.8% in Q1 129. Hungary: CB cut the base rate by 25bp, to 5.25% 130. Latvia's PM says country to return to growth in H2 131. Lithuania Q1 GDP came out better than expected, but recovery fragile 132. Think-tank estimates Poland Q1 GDP Growth at 3.5% 133. Poland gas firm PGNiG might up planned eurobond issue above EUR500m 134. Poland moves to settle dispute over the central bank's profit 135. Poland NBP maintains neutral bias, rhetoric remains dovish 136. Poland rate council seen holding rates at 3.5% through at least end-Q2 137. Polish central bank decided to keep the key policy rate unchanged 138. Polish retail sales in March surprised on the upside 139. Slovakia industrial PPI drops by 6.1% y/y in March 140. Slovakia Sells EUR205.5M Feb 2016 Bond, Average Yield 3.3444% SE CREDIT 141. Budget deficit seen posing risk Bulgaria's ERM II entry bid this yr 142. Bulgaria FinMin says planning to bring 2010 budget gap below 1.8%/GDP 143. An IMF team will be in Bucharest between April 27 and May 7 144. IMF, Romanian FinMin discuss government revenues collection 145. Romania - Negative outlook for Romania - likely to stay 146. Romania budget deficit widens in Q1 but within IMF limits 147. Romania's Business Sentiment Remains Mostly Positive in April 148. Romania's IMF arrangement seen failing in autumn 149. Romanian growth not seen surpassing 0.9-1.1% in 2010 150. Foreign remittances to Serbia up 10% y/y to $5.5bn in 2009 151. Tadic says Serbia ready for compromise solution over Kosovo 152. World Bank chief in Serbia says country needs new growth model 153. Serbia govt to cut spending by 0.75% of GDP per yr until 2015 154. Serbia's central bank sees dinar strengthening as depreciation pressure subsides 155. Serbia's Jan-Feb C/A deficit shrinks 22.4% on yr 156. Serbian government to cut income tax by 10% in fall 157. Turkey Central Bank continues to apply the exit strategy 158. Turkey central bank inflation report more dovish than expected 159. Turkey | Watch the credibility gap in Europe 160. Turkey Real Sector Confidence Index shows recovery is gaining steam 161. Turkey's Central Bank takes first step toward mopping up liquidity 162. Turkey | Lessons of the 2000/01 crisis for Greece 163. Turkish central bank released its quarterly inflation report 164. Turkish central bank ups foreign currency reserve ratio 165. Turkish central bank (TCMB) ups its quarterly inflation forecast

TOP STORIES CREDIT 1. CBR Cuts 25bp ñ Cautiously Hints at End to Easing VTB Capital 30 April 2010

The CBR has lowered its key policy rates 25bp, effective 30 April (bringing the total cut to 500bp since April 2009). The refinancing rate now stands at 8.00%, the one- day auction repo rate at 5.25% and the one-day deposit rate at 2.75%.

Market reacts to decision; we are reiterating our 8.00% refinancing rate forecast. The 25bp cut likely surprised the market as 1-year interest rates moved lower after the announcement (the 1-yr XCCY swap rate dropped 10bp). The timing of the decision was also a surprise, as the CBR had guided that the meeting would take place on 30 April. We expected the last 25bp cut in the refinancing rate to come in April and hence are keeping our 8.00% end-year forecast for this rate unchanged. At the same time, we are lowering our tom-next deposit rate forecast to 2.75%.

Supporting economic growth. In its press release, the CBR mentioned signs of economic recovery, particularly in consumption and incomes, but highlighted the need to cheapen the cost of capital and boost bank lending as the main reason for the rate decision. Interestingly, the regulator omitted to comment on speculative capital inflows, as the latter were probably less intensive in April due to the market turbulence on Greek debt problems.

CBR explicitly mentions inflation risks, hints at end to easing. For the first time, the regulatorís press release mentioned the risks of higher inflation in 2H10. The CBR slightly downplayed this by saying that part of this pick-up in CPI would be due to the low base effect. At the same time, it stated that an additional analysis of CPI dynamics was needed before further changes in policy rates. This, in our view, is a cautious hint that monetary policy easing is likely to be at an end.

We expect inflation to stay around the current level (6.1% YoY as of 26 April) through the summer before picking up in 4Q10. Coupled with more evidence of an economic recovery and the decline in bank lending rates, this would be enough for the CBR to stop cutting interest rates here.

2. PIGS-crisis will reach Central-Europe - UniCredit Equilor April 30, 2010

Negative market effects of the debt-crisis in the PIGS-countries (Portugal, Italy, Greece, Spain) are to spread into the Central Eastern European region - according to UniCredit Bank's warning. In a research note, the Vienna-based study group measured the spill over effect of the serial of downgrades of the Greek, Portuguese and Spanish creditworthiness, launched by S&P on Tuesday and Wednesday. According to the results, UniCredit found Croatia, Hungary and the Czech Republic particularly exposed to the indirect effects of the crisis via their banking sectors as many parent banks which operate in Hungary as well took a hit by their exposure to Greece which might negatively affect regions like the CEE. Russia and Turkey seems relatively protected against this spill over effect. "We believe that the key channel is now going through financial markets as all asset classes (commodities, equities and high yielding bonds) were under big selling pressure amid increasing risk aversion. This will obviously negatively affect the high beta market (HUF, PLN, TRY)" - analysts said in their research note.

3. Russian 'BBBs': Expensive Or Not? VTB Capital April 30, 2010

Following a long period of tightening, the valuations of Russian sovereign and corporate BBB-rated Eurobonds have reached levels at which investors are increasingly questioning the rationale of holding them.

Our strategy team believes that Russian bonds already look expensive relative to Russian equities (see page 47 of Crossing the Equator of 26 April). However, we do not suggest that dedicated EM fixed income investors with no equity mandate lighten up on their Russian exposures quite yet.

Our analysis shows that the Eurobonds of Russian oil & gas majors - particularly Gazprom, but also TNK-BP, LUKOIL and Transneft - are trading at spreads up to 100bp wider than their BBB peers and, therefore, have room to outperform. Russian banking issues, on the other hand, look more fairly valued.

The low volume of new issuances is an important factor that will provide support for Russian BBB Eurobond spreads in the coming months. Since the beginning of the year, Russian corporate borrowers have raised around USD 6.5bn in foreign currency Eurobonds, while Brazilian and Mexican issuers have borrowed USD 11.3bn and USD 9.3bn, respectively.

And for a number of reasons, we believe that Russian corporates will continue to be modest in terms of USD issuance this year. Among them are the more favourable conditions on the local market and still low growth appetite. Russian MinFin officials have also said recently that there are unlikely to be any new sovereign transactions in USD this year. High commodity prices, which we believe will be sustained, are also likely to be supportive for Russian credit spreads.

Our top pick among Russian BBBs is Gazprom's bonds: we particularly like the GAZPRU 14 WN and GAZPRU 19 issues.

4. Slow Recovery Ahead for Emerging Europe and Central Asia World Bank urges pro-poor social reforms as poverty and joblessness rises Press release April 26, 2010

The Emerging Europe and Central Asia (ECA) Region will face a slow recovery from the global economic crisis in the year ahead and countries facing tight fiscal pressures should take care to target social spending on the most needy and vulnerable, the World Bank said today at a press briefing at the World Bank/IMF Spring Meetings.

"Countries of Emerging Europe and Central Asia were hit the hardest by the global economic crisis and are likely to be the slowest to resume economic growth," said Philippe Le Houérou, World Bank Vice President for the Europe and Central Asia Region. "Growth in the Region, which had peaked at about 7 percent in 2007, fell to a negative 6 percent in 2009. 2010 is going to be a tough year for the Region with growth projected at around 3 percent. The prospects for 2011-2013 are only slightly better. Rising joblessness is pushing households into poverty and making things even harder for those already poor."

Emerging Europe and Central Asia is a diverse region. Differentiation among countries resulted in varying degrees of impact that the crisis has had on individual countries and will also define their prospects for recovery. 20 out of 30 countries in the Region experienced a decline in GDP in 2009, with GDP growth ranging from a negative 18 percent in Latvia to a positive 9.3 percent in Azerbaijan.

Overall, countries in the Emerging Europe and Central Asia Region will recover from the crisis more slowly than in other regions. According to the World Bank, current growth projections for 2011-2013 show the Region growing between 3 and 4 percent, as compared to approximately 5 percent in the Middle East and about 8 percent in developing Asia. 2010 is expected to be particularly difficult for Europe and Central Asia, with GDP growth forecasts about half of the forecast for the rest of the developing world.

The World Bank reports that the Region has faced the greatest fiscal pressures among all the world's regions during the global economic crisis. Average fiscal deficits amounted to 6 percent of GDP in Emerging Europe and Central Asia between 2008 and 2009, compared with 1 percent in the Middle East, 3 percent in Latin America, and about 4 percent in developing Asia and Africa.

"The impact of the crisis, as well as longer-term demographic, economic, and political forces, call for policies that deliver equitable access to services and inclusive growth," Le Houérou said. "Social spending reform, which has been lagging in many countries of the Region, is now becoming more urgent. Before the crisis, inefficiencies in social spending - which makes up more than half of government expenditures in some countries - may have been affordable for some. Now it is clear that they are not."

The agenda for 2010 - Start strengthening fiscal balances

The global economic crisis has taken a heavy toll on the Region's poverty reduction accomplishments of the last decade. The number of poor and vulnerable has risen by about 13 million in 2009, instead of falling by 15 million as expected before the crisis, with Armenia, Georgia, the Kyrgyz Republic, and Moldova particularly hard hit. As a result, 40 million people in Emerging Europe and Central Asia live below $2.50 per day, and about 160 million below $5 per day. Also, joblessness has been rising across the Region, with middle-income countries seeing greater increases in unemployment. According to the World Bank, the unemployment rate in 2009 exceeded 10 percent in Estonia, Hungary, Latvia, Lithuania, the Slovak Republic, and Turkey.

"The drivers of pre-crisis growth and improved government finances - rapid export growth, large capital inflows, high commodity prices, and domestic consumption and construction booms - are unlikely to return soon," said Indermit Gill, World Bank Chief Economist for the Europe and Central Asia Region. "At the same time, governments in Emerging Europe and Central Asia across the income spectrum spend more than their developing country counterparts in other regions," said Gill. "General government spending in the Region's middle income countries such as Poland, Russia, Ukraine, and Turkey is now higher than 40 percent of GDP in contrast with the 30 percent for middle income countries in other regions. According to projections, in 2010, the fiscal deficit in Emerging Europe and Central Asian countries will exceed 4.5 percent of GDP. Ensuring that governments can strengthen inclusion will become more difficult with tighter budgets, unless government spending is made more efficient."

"We are now seeing a growing divergence in the fiscal health of governments in the Region," said Gill. "Before the crisis, buoyant revenues allowed governments to both increase spending and reduce fiscal deficits. Annual revenues in the Region grew by about $500 billion between 2000 and 2007, and governments spent more than three quarters of this. During the crisis, fiscal responses started to diverge: most countries had to rely on automatic stabilizers like unemployment benefits to steady spending, but some had saved enough to implement sizeable fiscal stimulus programs. After the crisis, fiscal reform priorities will be even more differentiated. In 2010, countries should accelerate fiscal reforms. Priorities include a varying mix of reforming social security, resizing school systems, restructuring healthcare finance, reducing energy subsidies, investing in infrastructure, and scaling down stimulus programs. Done well, these reforms can help societies be more inclusive, economies more competitive, and nations decidedly more prosperous."

World Bank Assistance in Time of Crisis

Responding quickly to requests from countries in the Region for help in addressing the crisis, the World Bank more than doubled lending from an average of $3.9 billion in fiscal 2000-08 to $9 billion in fiscal 2009. In fiscal 2010, lending is projected to be $11 billion _ $10.5 billion IBRD and $0.5 billion IDA. Much of the new lending came in the form of Development Policy Loans (DPLs) to help countries restore growth and employment (e.g., $1.3 billion for Turkey), rehabilitate the financial sector (e.g., $400 million for Ukraine), address the social impact of the crisis (e.g., $144 million for Latvia), and improve the efficiency of social spending ($1.4 billion for Poland, $200 million for Belarus, and $100 million for Serbia).

In addition, in February 2009, the World Bank Group, the European Bank for Reconstruction and Development (EBRD), and the European Investment Bank (EIB) launched the Joint International Financial Institutions Action Plan, which supports banking systems and lending to the real economy in Central and Eastern Europe. As of end-2009, the institutions have provided more than €19 billion in crisis-related support for financial sectors in the Region. The Bank also participated in the European Bank Coordination Initiative (the Vienna Initiative), a forum for deepening the dialogue between home and host country banking supervisors, private banks, the European Commission, and international financial institutions.

5. Southern European debt markets have entered panic mode Danske April 30, 2010

Southern European debt markets have entered panic mode. The purpose of this monitor is to watch developments in local and global financial markets to keep track of the contagion from the crisis. So far, local contagion to the other PIIGS (Portugal, Ireland, Italy, Greece, Spain) is evident, global contagion is limited.

There are evident signs that the crisis is spreading to other PIIGS sovereign debt markets. Beside Greece, Portugal is the hardest hit country with its sovereign yield and CDS reaching new highs. More concerning, the Portuguese covered bond market seems to be in big trouble, with spreads widening by 150bp over the past week.

Spain and Ireland are also hit, but to a lesser extent than Portugal. There is little doubt, though, that they are next in line. It is positive to see that the Irish CDS spread remains very low. Southern European banks are under pressure with CDS spreads wider.

EUR touched a cycle low vs. USD yesterday and the implied currency volatility is on the rise - but still much lower than during the financial crisis.

Although some broader contagion is evident elsewhere in global markets it remains modest. While the 3M EURIBOR - EONIA spread remains very narrow, the forward market is getting a bit nervous with the 6x9 FRA EOINIA spread moving wider.

Global equity markets have taken a hit and volatility is moving higher, but again the contagion remains relatively modest so far.

Eastern European currencies have weakened. The EMBI spread has widened a bit.

6. Contagion risks seen greatest in Bulgaria, Romania and Hungary bne April 29, 2010

Capital Economics says that while financial markets across the region have been hit by the latest developments in Greece, contagion risks are greatest in Bulgaria, Romania and Hungary.

"No country is immune from the troubles in Greece and financial markets across the region are likely to suffer further unless or until the situation is brought under control. That being said, markets in those countries with the weakest economic fundamentals are greatest are most exposed to contagion risks. Fragile banking sectors and large external vulnerabilities make the Baltics, Romania and Bulgaria obvious targets. Elsewhere, fiscal risks are perhaps greatest in Hungary, while Russian markets will be hit hard if commodity prices slip back. By contrast, reasonably solid macro fundamentals should ensure that markets in the Czech Republic are hit less hard."

"Near-term contagion risks aside, those countries with the greatest direct exposure to the Greek economy lie in the south east of the region. Admittedly, trade ties are relatively small. While Greece accounts for around 10% of Bulgarian exports, it accounts for less than 2% of Romanian and Turkish exports (and less than 1% in the remainder of Emerging Europe). But financial linkages are much stronger. While data are patchy, we estimate that Greek banks account for around 20% of total banking assets in Bulgaria and around 15% of total banking assets in Romania."

7. EU27 Feb industrial new orders rise by 1.1% vs Jan Eurostat April 26, 2010

In February 2010 compared with January 2010, the euro area (EA16) industrial new orders index rose by 1.5%. In January 20103 the index fell by 1.6%. In the EU27 new orders increased by 1.1% in February 2010, after a rise of 0.3% in January 20103. Excluding ships, railway & aerospace equipment4, for which changes tend to be more volatile, industrial new orders rose by 2.5% in the euro area and by 1.9% in the EU27. In February 2010 compared with February 2009, industrial new orders increased by 12.2% in the euro area and by 12.7% in the EU27. Total industry excluding ships, railway & aerospace equipment4 rose by 14.0% in the euro area and by 13.5% in the EU27. Monthly changes In February 2010 compared with January 2010, new orders for intermediate goods rose by 2.6% in the euro area and by 2.9% in the EU27. Durable consumer goods increased by 2.5% and 2.4% respectively. Capital goods increased by 2.3% in the euro area and by 1.4% in the EU27. Non-durable consumer goods dropped by 1.2% and 2.7% respectively. Among the Member States for which data are available, total manufacturing working on orders rose in sixteen and fell in six. The highest increases were registered in Hungary (+9.3%), Slovenia (+6.3%) and Slovakia (+5.2%), and the largest decreases in Denmark (-6.3%), Malta (-5.8%) and Greece (-4.5%).

Annual changes In February 2010 compared with February 2009, new orders for intermediate goods rose by 23.0% in the euro area and by 20.6% in the EU27. Capital goods increased by 8.4% and 11.5% respectively. Durable consumer goods gained 5.6% in the euro area and 15.1% in the EU27. Non-durable consumer goods fell by 2.4% and 5.7% respectively. Among the Member States for which data are available, total manufacturing working on orders rose in eighteen and fell in five. The highest increases were registered in Latvia (+39.4%), Slovakia (+29.4%) and Germany (+24.5%), and the largest decreases in Ireland (-7.6%), Greece (-5.7%) and Denmark (-5.4%). These estimates are released by Eurostat, the statistical office of the European Union.

8. Forint and leu most at risk from Greek contagion Danske April 30, 2010

The Greek story continued to be the key driver of EMEA FX markets, and especially in the first half of the week CEE currencies came under pressure on heightened concerns over the Greek debt situation. However, in the second half of the week the situation has stabilised a bit on EMEA FX markets, with a slight easing of the market's worries over the situation in Greece (and the other PIIGS countries). The weakest performing currency in the region over the past week has been the Hungarian forint. This not only reflected contagion from Greece, but also worries about the new Fidesz (conservative) government in Hungary: in particular, the new government's desire to adjust the terms for Hungary's IMF/EU loan; the announced (partly) unfinanced tax cuts; and new Prime Minister Orban's comments about the Hungarian central bank governor, Simor. Preview: forint and leu most at risk from Greek contagion Even though worries over the Greek situation have eased slightly, they are likely to remain a key market driver in EMEA markets for some time to come. We therefore recommend staying very cautious in the EMEA FX markets - naturally, most cautious in the CEE currencies going into next week. In that connection, it should be noted that our EMEA FX Scorecard has turned slightly negative on the EMEA currencies this week, indicating the risk of further weakness. The risk from a currency perspective is higher for the EUR-sensitive currencies than for the USD-sensitive ones. Therefore, we would (for example) expect the Turkish lira to weather a renewed Greek storm better than the Hungarian forint. This is also the indication from our EMEA FX Scorecard, where Turkish lira remains the highest- scoring currency - mostly due to strong macroeconomic conditions and the attractive carry. From this week, we have included two new currencies in the EMEA FX Scorecard - the Israeli shekel and the Romanian leu. The shekel debuts with a positive score while the leu shows a negative score. See the next page for our Scorecard on the shekel and leu. The two most negative scoring currencies in our EMEA FX Scorecard at the moment are the Hungarian forint and the Romanian leu. These two currencies also happen to be two of the most sensitive EMEA currencies to a further escalation of Greek worries. We therefore particularly recommend caution on these currencies. The Czech koruna has withstood the Greek storm fairly well and we continue to see CZK as the safe haven in CEE. The zloty should also perform relatively well compared with for example the forint, but the experience from last year's CEE turmoil shows that the zloty often serves as the proxy currency for worries over the CEE region. Therefore, in the short term we are a bit more cautious on outright long positions in the zloty - even though its score in our EMEA FX Scorecard remains slightly positive. Scorecard trade of the week _ Buy TRY/RON Last week we recommended buying TRY/ZAR based on the signals from our EMEA FX Scorecard - buying the highest scoring currency against the lowest scoring currency in the Scorecard. The trade has performed reasonably over the past week. Given that TRY is still the highest scoring currency and RON the lowest, we therefore recommend buying TRY/RON going into next week.

9. S&P downgrades Greece to speculative level Renaissance Capital, Russia Friday, April 30, 2010

We saw more flight to quality yesterday (27 Apr) on global financial markets, with major European and US indexes moving down sharply by 2-3% on average, the euro significantly weakening against the dollar and US treasuries yields contracting by 5- 10 bpts. In an already tense environment, S&P's decision to downgrade Greece and Portugal put more strain on markets. S&P downgraded Portugal two notches to _-, while shifting Greece's sovereign rating from investment to sovereign grade (from ___- to BB+). Such a substantial downgrade of Greece increased fears of Greek sovereign bond holders. As a result of a sell-off of two-year Greek bonds the yield expanded by 200 bpts by the end of the trading session to 15.0%. Yields of Portugal bonds increased by over 100 bpts, with Italy and Ireland correcting notably as well

10. Greece downgrade doesn't derail equity and bond fund inflows EPFR April 30, 2010

Downgrades to the credit ratings of Greece, Portugal and Spain, with Greece's being cut to junk status, roiled equity and bond markets around the world during the final days of April. Investors responded predictably by pulling money out of Europe ex-UK Regional Equity Funds and continued to funnel substantial amounts of fresh money into the bond funds. However, investors continued to make net contributions to most equity and bond fund groups. During the week ending April 28, Emerging Markets Bond Funds had their third best week on record, which follows fast on the heels of the two even stronger weeks of inflows. In April alone these funds received more than $5 billion from investors. Global and US Bond Funds both took in over $2 billion and High Yield Bond Funds saw year-to-date inflows push over the $8 billion mark.

Flows into equity fund groups were mixed. Global Equity Funds absorbed over $1.7 billion and EMEA Equity Funds had their best week since late October. But six of the nine with sector mandates posted outflows, although Commodity Sector Funds took in nearly $1 billion with funds investing in gold and precious metals accounting for 50% of that total, and Latin America Equity Funds recorded a third straight week of outflows.

Overall, EPFR Global-tracked bond funds absorbed another $6.73 billion during the fourth week of April while equity funds took in a net $4.86 billion. Money Market Funds surrendered $3.8 billion, a 16-week low.

Emerging Market Equity Fund Flows

The combined Emerging Market Equity Funds took in $1.5 billion of net inflows during the week, bringing YTD inflows to $15.2 billion. By contrast, the combined Developed Market Equity Funds tracked have YTD outflows of $3 billion.

Investors continued to find fresh money hard to come by in late April as fears of a sovereign induced credit squeeze crimping growth in European markets and China's ongoing efforts to prevent its economy from overheating called earlier forecasts into question. EMEA, Asia ex-Japan and the diversified GEM Equity Funds all posted inflows ranging from $465 million to $641 million while Latin America Funds experienced redemptions totaling $176 million.

In contrast to the previous two weeks, the bulk of the outflows from Latin America Funds came from those with regional mandates. Brazil Equity Funds did see net redemptions for a third straight week ahead of the central bank's 75 basis point rate hike, but the amount was minimal.

Another BRIC market, Russia , continued to drive flows into EMEA Equity Funds, which saw YTD inflows move north of the $3 billion mark. Investors also committed a 26-week high of $115 million to Emerging Europe Equity Funds despite the uncertainty about the prospects for this sub-region's key export market, the Eurozone, and sizable fund allocations to countries in the region weighed down by fiscal deficits.

Investors looking for exposure to Emerging Asia gave China's latest efforts to prevent a red hot real estate market from becoming a bubble a cautious thumbs-up , with China Equity Funds taking in a modest $132 million for the week, and Taiwan's export story also attracted some positive attention.

US, Global, Europe and Japan Equity Fund Flows

Concerns about spillover effects from the budgetary woes of the Eurozone's Mediterranean tier of members competed with robust first quarter earnings and the US Federal Reserve's dovish statements for the hearts and minds of developed market equity investors during late April. Four of the five major EPFR Global-tracked developed markets fund groups ended the week having posted inflows ranging from $2.49 billion for US Equity Funds to $105 million for Pacific Equity Funds.

Not surprisingly, Europe Equity Funds were the exception, recorded outflows for the 12th week in a row that took YTD redemptions past the $8 billion mark. Regional ex- UK Equity Funds bore the brunt of the latest redemptions, which were partially offset by inflows attributable to UK and Germany Equity Funds.

Japan Equity Funds continued their strong start to the year, posting inflows for the 17th time in the past 18 weeks, as exporters in the world's second largest economy continue to ride the cyclical recovery in global trade. With the peak of the Japanese 1Q10corporate earning's season still to come, this fund group has posted its best start to a year since 2004 despite persistent concerns about weak domestic demand, deflation and a government seemingly intent on rolling back many of the modest reforms enacted over the previous four years.

On the other side of the Pacific US Equity Funds continued to benefit from a largely positive 1Q10 earnings season, and were given a boost by the Federal Reserve's affirmation that extremely low interest rates are still appropriate. For the second week running flows were spread across all capitalizations and styles, with Large Cap Blend Funds the only sub-group to experience net redemptions.

The diversified Global Equity Funds saw their YTD inflows climb to within striking distance of the $13 billion mark while Pacific Equity Funds extended their current inflow streak to 11 straight weeks.

Sector Funds

Commodity Sector Funds stood out among the nine major sector fund groups during the fourth week of April, absorbing of 21-week high of $995 million as worried investors sought exposure to gold and other precious metals. The other eight endured another subdued week in a year where geography appears, for the moment, to be the biggest criteria for investment decisions.

Financial Sector Funds continued to struggle with the headwinds generated by the SEC suit against investment bank Goldman Sachs and sovereign credit concerns, surrendering another $183 million, and Energy Sector Funds posted modest outflows for the third time in four weeks as US stockpiles expanded.

Sentiment towards the more defensive sectors was mixed. Healthcare/Biotechnology, Utilities and Telecom Sector Funds all posted outflows. But Consumer Goods Sector Funds attracted another $242 million, keeping this group in second place behind Real Estate Sector Funds in terms of YTD inflows.

Bond and other Fixed Income Funds

EPFR Global-tracked bond funds retained their momentum in late April despite the sound and fury generated by Standard & Poor's downgrades of three Eurozone members and a jump in the risk premium for emerging markets debt. Global Bond Funds and US Equity Funds extended their current inflow streaks to 53 and 59 consecutive weeks respective, Emerging Markets Bond Funds took in another $1.22 billion and High Yield Bond Funds saw YTD inflows climb to 37% of the full year total for 2009.

Of the money committed to Emerging Markets Bond Funds, over 75% made its way to funds investing in local currency debt versus a YTD average of 54% as the spread between US Treasuries and JP Morgan's benchmark EMBI+ index rebounded past the 260 basis point level.

US Inflation Protection Bond Funds saw flows pick up sharply in late April: the $857 million they absorbed represented a new weekly record and a third of all flows into US Bond Funds. Flows into US Municipal Bond Funds continue to come off their late 3Q09 peak as earlier fears of aggressive income tax hikes continue to ebb.

11. How does the latest IMF economic outlook tally with Erste GDP forecasts? Erste April 26, 2010

The IMF's 2010 forecast for economic growth in Romania is very close to ours, 0.8% vs. 0.9%, while for 2011 the Fund is probably more confident of a faster rebound of domestic demand, which could push economic growth to 5.1%, as compared to the 3% seen in our baseline scenario. Dumitru Dulgheru, Banca Comerciala Romana

For 2010, the forecasts for the Czech Republic are almost in line, differing by a mere one-tenth of a percentage point. For 2011, the IMF is slightly more optimistic (2.6%, vs. 2.2% for Erste Group), but there is still not a significant difference. Martin Lobotka, Ceska sporitelna

Regarding 2010, we remain a bit more cautious on the dynamics of the recovery in Croatia, given the still sluggish domestic demand prospects and downside risks related to the tourist season performance. Therefore, our baseline view for 2010 remains a minor contraction of around 1%, vs. the practically stagnant performance suggested by the IMF. Our view and that of the IMF on 2011 and a return to positive territory are aligned. Alen Kovac, Erste Bank Croatia

The recently published IMF economic outlook can be regarded as pessimistic for 2009, whereas it seems more optimistic for 2010 than in our forecast for Hungary. We think GDP could grow 0.3% this year (against the IMF's -0.2% forecast), but our 2011 forecast is a 2.7% increase, vs. the IMF's 3.2% growth projection. Nevertheless, the Fund's forecast still falls short of the very optimistic 3.7% growth assumed by the Hungarian government for 2011. Zoltan Arokszallasi, Erste Bank Hungary

The IMF forecasts real GDP growth of 3.7% for Ukraine in 2010, compared to our estimate of 2.8%. The reason for the difference is the IMF's greater optimism compared to our outlook for external demand. We are more cautious in forecasting higher growth, due to the great volatility of the Ukrainian economy, given external demand and the remaining risks for global economic development (China's real estate market, European sovereign debt). Maryan Zablotskyy, Erste Bank Ukraine

The IMF expects the Turkish economy to expand by 5.2%, vs. our growth forecast of 4.6%. For 2011, however, the Fund has a much more conservative growth forecast of 3.4%, compared to our 5.3%. Erkin Sahinoz, Erste Securities Istanbul

The IMF is more positive on Slovak growth this year, expecting 4.1% growth, compared to our 2.6% estimate (although we see positive risks; 4% is the top of our expected range, rather than mid-forecast). Next year, we are pretty close in our estimates; the IMF sees growth at 4.5%, whereas our estimate is 4.0%. Maria Valachyova, Slovenska sporitelna

The IMF's latest forecast and our baseline scenario for Poland are very close. As for this year, we expect the Polish economy to expand by 2.5%, whereas the IMF is slightly more optimistic, anticipating +2.7%. As for next year, we expect +3.3%, the IMF +3.2%. Jana Krajcova, Ceska sporitelna

12. Sovereign bond issuers tough out Greek drama bne April 28, 2010

As Greece's financial troubles have continued into the second quarter, heavy Eurobond issuance by emerging European sovereigns in the first quarter has paid off handsomely. By issuing early and in size, a number of countries have now effectively achieved their 2010 overseas bond funding targets, enabling them to pick and choose whether they venture back into the markets later in the year or indulge in the luxury of pre-funding part of their 2011 liabilities.

"The fundamental credit story across Central and Eastern Europe has always stacked up well against some of the ClubMed countries in Southern Europe and this year has just borne that out," says Andrew Dell, head of debt capital markets for Central and Eastern Europe, Middle East and Africa (CEEMEA) at HSBC.

The global economic crisis has also had the effect of differentiating the countries of the region. "At the start of 2009, CEE was viewed as one homogenous region that nobody wanted to touch. But as time has passed there's now much more differentiation between individual countries and the market is now once again very supportive of the better CEE sovereigns," says Clemens Popp, head of financial and public sector entities origination at UniCredit Group.

Furthermore, the positive reception for their overseas borrowing has buoyed investor sentiment at home, enabling several governments to launch record-breaking issues in their domestic markets. "Issuing early and in size was absolutely the right issuance strategy for CEE sovereigns at the start of the year," says Mike Eliff, managing director, CEEMEA debt capital markets at RBS in London. "The issuers that decided to come to market at the start of the year will definitely be pleased with their choice."

Turkish delight

Turkey started the ball rolling in January with a $2bn, 30-year bond via HSBC, JP Morgan and UBS, which attracted more than $7bn worth of orders from investors flush with cash at the start of the year. Notably, the deal attracted stronger-than- usual overseas demand, with Turkish buyers accounting for just 25% of the initial book. Investor appetite was helped by a double-notch upgrade by Fitch from 'BB-' to 'BB+' in December and hopes - since dashed - of an imminent deal with the International Monetary Fund (IMF). The deal covered around third of Turkey's overseas borrowing needs for 2010.

Stefan Weiler, executive director, debt capital markets at JP Morgan in London, says that with market indicators for Turkey such as credit default swaps - the cost of insuring against default - spread levels at or near record lows, it made perfect sense for the sovereign to lock-in attractive funding levels early in the year. "Turkey acted swiftly and decisively to be the first emerging market sovereign to issue in 2010. Not only that, but they targeted the 30-year maturity that is not always open to EM borrowers. Both factors were very important to ensure success, as it gave Turkey massive investor focus and exposure as well as access to the strong market liquidity at the start of the year," says Dell at HSBC.

The positive reception for Turkey's international bond issue also had domestic benefits, with Turkey auctioning a 10-year, fixed-rate Turkish lira issue for the first time, thanks to lower domestic interest rates and strong buyer interest. The ability to switch between markets should help Turkey to lower its overall borrowing costs and further boost its fiscal credibility.

Polish

Emerging Europe's economic star turn in 2009, Poland, continues to impress investors in 2010, with its €3bn, 15-year deal more than 2-1/2 times oversubscribed. It was priced at 148 basis points (bps) over swaps, well inside initial price talk of 155-160 bps over. HSBC, ING, Société Générale and UniCredit lead managed the transaction, its largest since 2006, which represented around half of Poland's €5.5bn international bond funding target for 2010. "Poland issued a super benchmark size at a long tenor, which sent out a very strong message to the market and reflected the strong investor perception of Poland compared to peers," says HSBC's Dell.

Poland also benefited domestically from the positive reception for its first Eurobond of 2010, raising a record PLN6.6bn ($2.2bn) through a of two-year notes note auction on the back of over PLN16.19bn worth of orders.

Next up from the region was Slovenia whose €1.5bn, 4.125% 2020 bond via Calyon, Deutsche Bank, JPMorgan and Nova Ljubljanska Banka attracted €2bn of demand from across Europe from 150 investors and was priced at the tight end of the 68-70 bps over swaps guidance. Slovenia only needed to raise a total of €2.2bn this year from the Eurobond markets and so its successful issue meant it had no need to fret about the problems posed faced by Greece and other highly cash-strapped EU countries such as Portugal, Spain and Ireland - the so-called Pigs.

Another country to raise its entire external funding requirement for 2010 in one fell swoop was Hungary, whose $2bn, 10-year issue via Citigroup and Deutsche Bank attracted $7bn of orders, enabling pricing at the tight end of its 265-275 bps over US Treasuries marketing range. Laszlo Buzas, deputy chief executive of the AKK government debt management agency said the country's first dollar issue for five years enabled it to diversify its funding base and to avoid a packed euro arena, dominated by a potentially make-or-break issue by Greece, which issued on the same day. According to Nigel Cree, head of debt syndicate for Deutsche Bank in New York, the deal marked a notable achievement for Hungary with around 65% of the paper was placed in the US, mainly with money managers, insurance companies and hedge funds. In contrast, the bulk of the Hungary's previous dollar transaction went to buyers in Europe and Asia.

Baltic barnstorms

It's testament to the dramatic upsurge in investor sentiment to emerging Europe that Lithuania, whose economy shrunk 15% in 2009, was also able to make barnstorming entry to the Euromarkets with a $2bn, 10-year issue led by Barclays Capital, HSBC and Royal Bank of Scotland. "We got some fantastic anchor orders from the US, and because of that Lithuania was able to issue in both size and at a tight level versus secondaries," says Elliff at RBS.

The deal was the biggest-ever international bond from the Baltics and was easily covered on the back of $7bn worth of orders from over 300 accounts. "Given where we were a year ago this was a real achievement for Lithuania," says Eliff.

After a dire 2009, the economic outlook for 2010 is looking brighter, with Lithuanian Finance Minister Ingrida Simonyte predicting ahead of the bond launch that rising exports mean that GDP will rise by 1.6% versus earlier predictions of a 4.3% contraction. "Based on a detailed analysis of export data, we see clear signs of a vigorous and rapid recovery of exports and if this trend continues we will see double- digit export growth in 2010," says Simonyte.

With GDP set for a recovery in 2010, Simonyte says that public finances in Lithuania should improve as well. "Thanks to the improved GDP forecasts, we have revised the general government deficit target down to 8.1% of GDP in 2010, which is much lower than the previous 9.5% figure," says Simonyte, adding that as a result Lithuania should meet the 3%-of-GDP deficit cap set out in the Maastricht criteria in 2012. "Lithuania will continue its drive to consolidate public sector finances, thus maintaining a high level of investor confidence." Having secured $2bn the country can now pick and choose between the domestic and international bond markets to fund itself through the rest of 2010.

With Greece proving that it had market access in late February with a well supported €5bn bond issue, sovereigns from emerging Europe were once again keen to tap into the more upbeat market tone in March. Slovenia completed its overseas funding needs for 2010 with a €1bn, five-year deal via Abanka Vipa, Commerzbank, RBS and Société Générale, which was priced at the tight end of its pricing guidance. Bostjan Plesec, acting head of the treasury department at the Slovenian finance ministry, says that the deal was primed and ready in advance so as to take advantage of the positive market conditions after Greece soothed investors' nerves with its transaction.

Turkey also exploited the more positive market tone to make further inroads into its 2010 funding target with a $1bn, 11-year deal via Bank of America Merrill Lynch, Barclays Capital and RBS. On the back of $5bn of orders from over a 100 accounts, the issue was priced at a launch spread of 202.7 bps over US Treasuries, the lowest overall cost for a dollar-denominated Eurobond from Turkey. With its latest transaction, Turkey has raised around 55% of its 2010 overseas borrowing programme. "Those issuers that went for duration extension trades created a win- win situation for all concerned by offering investors value for money by giving them long-term exposure to improving credit stories, while at the same time allowing issuers to term out the maturity of their debt portfolios and lock in low absolute yields," says HSBC's Dell.

While Turkey has been a near ever-present borrower in the international bond markets of late, Romania broke a near two-year Euromarket duck with the launch of a €1bn, five-year deal via Deutsche Bank, EFG Eurobank and HSBC, which priced at 268 bps over mid-swaps. Romania had originally hoped to a launch the deal last year, but pulled it in the wake of the government's collapse. "There's a binary contrast between the first quarter of 2009 and the first quarter of 2010, with the result that delayed transactions from last year have been able to come to market. That's a clear signal that the market is extremely receptive to sovereign issuance from CEE right now," says Popp at UniCredit.

As a result of nearly €5bn worth of orders from over 300 accounts, Romania's comeback issue was priced much tighter than initial price talk of 275 bps, benefiting from the fact that S&P raised its outlook on its 'BB+' rating the country to stable, from negative, in the run-up to launch. The rating agency cited expectations that the country would reduce its deficit to 6.4% of GDP this year and comply with the terms of a €20bn IMF/EU standby agreement. "Romania printed a good, strong trade achieving simultaneously the lowest yield and largest size ever issued by the country," says Dell at HSBC.

Given the warm reception for the issue, Finance Minister Sebastian Vladescu says that the country is mulling a further transaction later in the year. "Depending on market conditions, we would be ready to issue again, but we don't have a precise date at the moment."

Meanwhile, Poland rang the changes with CHF475m ($441m) of four-year bonds priced to yield 88 bps over swaps. Lead managed by RBS and UBS, the issue was more than doubled from an initially planned target size of CHF200m and was priced considerably tighter than a CHF750m, five-year deal from August 2009, which was pitched at 138 bps over swaps. "There's a lot of investor demand for the perceived safer sovereign names from the CEE region, such as Poland, which are outperforming a number of Western European countries on the economic front," says Elliff at RBS.

Poland then went on to score a remarkable hat trick of Eurobonds in the first quarter, selling a €1.25bn, seven-year issue at 100 bps over swaps via Barclays Capital, Citigroup and HSBC. As the only EU economy to avoid a slipping into recession in 2009, Poland clearly maxed its high economic standing to the hilt in the first quarter, selling international bonds at record low yields and also attracting foreign investors into the Polish government bond market, where overseas holdings of are at their highest level since 2004. Deputy Finance Minister Dominik Radziwill said Poland is also looking to target investors in Asia with $1bn bond sale. "The key message for sovereign issuers from the first quarter is not to be too cautious or defensive, but rather be decisive and seize the opportunities that are available. In short, be bold and go big and go long," says HSBC's Dell.

No April fools

By the end of the first quarter, there was still plenty of sovereign issuance to come from emerging Europe, whether from more established names such as the Czech Republic, Slovakia and Ukraine, or potential Euromarket debutants such as Albania and Belarus.

In April, Albania began its roadshow for its debut three- or five-year Eurobond via Deutsche Bank and JPMorgan, worth about €400m. Belarus Finance Minister Andrei Kharkovets said the country might try to raise $500m over a similar tenor. BNP Paribas, Deutsche Bank, RBS and Russia's Sberbank will lead manage that deal. And Mongolia shortlisted Deutsche Bank, Goldman Sachs, HSBC, ING and Morgan Stanley as potential lead underwriters for an inaugural global bond issuance, but the country has yet to give an indication when it will proceed with the sale. "There is demand for new sovereign credits, but there's a lot of intensive investor work required, involving roadshows and one-one meetings in order to establish a capital markets track record," says Popp at UniCredit. But he adds that Eurobonds from debut sovereign issuers will help ease the path to market for other types of credits. "It's always useful to have a sovereign benchmark to price issuance from other types of borrowers against."

But the most eagerly awaited sovereign issue of the second quarter was the return of Russia to the international bond markets in April with its first issue since the government defaulted on its debt back in 1998. Rather than shun the sale, investors were so keen that Russia ended up paying the lowest ever yield.

On April 22, Russia sold $2bn worth of five-year bonds and $3.5bn in 10-year bonds. In terms of pricing, the five-year portion pays a coupon of 3.625% and spread of 125 basis points over US Treasuries, while the 10-year tranche pays a 5% coupon and spread of 135 basis points over Treasuries. The Eurobond was more than twice oversubscribed with more than 500 investors participating in the deal, syndicate bankers working on the deal said.

Russia observers said the price of the bond made a mockery of Russia's rating by the three big international rating agencies. The country's credit rating is way too low, as it boasts some of the strongest fundamentals in the world, but it's still tarred by its increasingly irrelevant "emerging market" moniker, they argue.

Consider that on the day Iceland defaulted on its debt at the start of this crisis, it enjoyed higher ratings than Russia. Today, Russia's 'Baa1' rating from Moody's Investors Service is still the same as bailout-dependent Iceland's, but Fitch Ratings and Standard & Poor's currently class Russian debt as 'BBB' - even lower than Moody's. "These ratings seriously understate Russia's ability to service and repay its debts. Some say they reflect the risk that Russia might 'choose to default'. Yet Russia's political elite was traumatized by 1998. [Finance Minister Alexei] Kudrin, with the blessing of successive premiers, has spent the last 10 years trying to rebuild his country's fiscal reputation. The idea of a deliberate default is absurd," says Liam Halligan, chief economist with Prosperity Capital Management.

Although there's the continued threat of market contagion from the Greek tragi- farce, bankers say that most sovereign issuers from CEE will enjoy market access. "There's a very benign market for sovereign issuers from CEE right now, on the back of the fact that the debt dynamics of many sovereigns from the region are seen as relatively attractive versus some of their Western European peers," says Elliff at RBS.

Weiler at JPMorgan believes that most sovereigns will look to issue whenever there is window of opportunity in the second quarter and he also expects that there may be a pick-up in euro-denominated issuance as market jitters over the state of Greece's finances subside.

13. The uncertainty caused by the Greek crisis is spreading. Erste April 30, 2010

In the past week, Greece has made it back into the headlines. Although the Greek government called on the financial support from the Eurozone partners and the IMF last week, that did little to calm the financial markets. Greece has to service a government bond of EUR 8.44bn on 19 May, and the support package should be available by then.

Yesterday's downgrading by S&P fuelled the market participants' uncertainty concerning the swift putting into action of the bailout. After the rating of Portugal had been adjusted downwards by two steps to A-, S&P proceeded to downgrade the rating of Greece from BBB to BB+ only a few minutes later, and at the same time warned investors that they were only standing a 30% to 50% chance to get their money back in the event of a debt restructuring or a default. This means that Greece has now been relegated to the speculative segment by S&P.

The short-term rating was also revised downwards. The outlook is negative, which may entail another downgrading. This negative revision manifests worries that Greece may not be able to see through the reforms necessary to reduce its debt.

Moody's Greek rating is currently A3, but has been put on the negative watch list. Fitch on the other hand rates Greece one rank above the speculative segment (BBB-) with a negative outlook. In the wake of the negative news, Greek bonds came again under strong pressure, with the 2Y yield rising by a particularly strong degree to 18.5%. The prospect of weak economic growth and the high capital costs have exacerbated the fiscal problems of the country. The costs of default insurance (CDS) have increased drastically as well. Thus, the CDS on Greek government bonds has reached a high of 824bps. This means that it costs EUR 824,000 per year to insure EUR 10mn worth of bonds against default.

Although the members of the Eurozone and the IMF have agreed on the package for Greece, the financial markets are currently being sceptical with regard to the cautious statements that have been made and prefer to wait for further details. After already agreeing to contribute EUR 15bn to the package, the IMF is now pondering an increase of EUR 10bn according to the Financial Times. This way the IMF would hit the upper limits of its possible bandwidth in supporting Greece.

The nervousness in the financial sector can mainly be explained by the high dependence on the sovereigns - as also suggested by the most recent "Global Financial Stability Report" of the IMF that was published last week. According to the IMF, the risks for the financial markets and the economy have been on the decrease since autumn 2009 due to governmental support packages and central bank interventions. Total write-downs in the banking sector were revised downwards by USD 500bn to USD 2,300bn relative to six months ago, with about two thirds of the total write-downs estimated (USD 1,500bn) already accounted for.

The regional breakdown yields a mixed picture: whereas the US banks will only have to recognise 20% of the write-downs anymore this year, the additional need for write-downs among Eurozone banks is higher. According to the IMF, banks are facing refinancing needs of USD 5,000bn in the next three years. The IMF regards the development of the sovereign debt as the biggest challenge in the coming years, where a barrage of new issues of sovereigns can be expected alongside stepped up primary market activities of banks and companies.

As already discussed in the previous issue of Credit News (14 April), the uncertainty in the arena of country ratings is likely to persist and thus set the tone on the capital markets. As far as corporate bonds are concerned (both from the demand/investor and the supply/company perspective), it remains dubious how the credit spreads would react to the budgetary weaknesses of the different states. The CDS spreads have so far recorded the largest widening, whereas cash bonds have hardly been affected at all. However, it has become evident that, although the spreads are under no pressure to widen from the corporate sector, the constant problems among sovereign issuers are starting to spill over into the credit markets. In case of a new crisis of confidence, we expect corporate bond spreads to widen.

14. VISEGRAD: Worst days behind emerging Europe, but then so are best bne April 30, 2010

"The worst days are behind us, but then so are the best," was how Gunter Deuber of Deutsche Bank Research put it at the BACEE Country and Bank Conference in Budapest in mid-April.

The scale and pace of the recovery in emerging Europe, though certainly dwarfed by that in Asia and Latin America, has certainly been surprising - an impression given further weight by the release in April of the International Monetary Fund's "World Economic Outlook," in which it forecasts the region's growth in real activity at 3% in 2010, picking up to 3.5% in 2011.

Deuber noted that the ostensible resilience of emerging Europe owes much to Poland, the largest economy in Central Europe, managing to stay out of recession, growing 1.8% in 2009. "CEE had rather a positive performance, with only a less than 4% contraction, which was helped by Poland," says Deuber. "Poland had no pre- crisis economic boom and moderate credit expansion, so the crisis hit the country just at the right time."

What has also undoubtedly done much to help put a floor under the recession and aided the recovery is that the banking systems in emerging Europe, by and large, all remained remarkably profitable. "Despite the adverse conditions, the financial system has remained pretty stable," said Eva Zamrazilova, a board member of the Czech National Bank.

Taking Hungary as an example, one of the worst-hit countries in emerging Europe by the crisis (its GDP contracted by 6.3% in 2009), apart from a few banks most stayed profitable with a return on equity (ROE) of 9.3% even as non-performing loans (NPLs) hit 5.9% of the total at the end of 2009. "The trading profits were quite high and while one-off factors like the rise in the value of government bond holdings will be much lower in 2010 than 2009, Hungary banks have shown they can remain profitable even in tough times. Hungary's banking sector is much more resilient to shocks, much more than in early 2009," said Peter Tabak, director of finacial stability for the National Bank of Hungary.

This pattern of rising NPLs, lower lending levels yet still eking out profits was even seen in Latvia, the country most affected by the crisis, where the banking system remained profitable with an ROE of 12.4% in 2009. "We've seen a substantial growth in business volumes in the first quarter and we're heading to get back to pre-crisis levels," says Roberts Idelson of local Parex Banka, which had to be effectively nationalised in late 2008 after a run on the bank, but which in an amazing turnaround could be sold as soon as this year to a strategic investor.

Another major factor has been the unexpectedly quick recovery in Germany, which has had a profound effect on the neighbouring countries in emerging Europe. On April 23, economic research institute Ifo reported that German business confidence experienced a strong gain in April, rising by 3.4 points to 101.6 - its highest level since summer 2008 - as respondents to the survey reported they were becoming more optimistic about current economic conditions.

The upshot is that growth in emerging Europe will almost certainly be stronger than that in Western Europe, with some economists predicting even higher growth than the IMF sees. "So growth will be above western markets, at about 4%, about 2 percentage points of a gap, but the end of the booming growth means we'll remain below pre-crisis levels," said Fabio Mucci, senior economist at UniCredit Group.

Restrained

Indeed, those levels are far below the roaring economic growth seen before the global economic crisis swept over the continent, something that's unlikely to change over the medium term, and the recovery prospects vary considerably from country to country. "Economies that weathered the global crisis relatively well (Poland) and others where domestic confidence has already recovered from the initial external shock (Turkey) are projected to rebound more strongly, helped by the return of capital flows and the normalization of global trade," the IMF said in its recent report. "At the same time, economies that faced the crisis with unsustainable domestic booms that had fueled excessively large current account deficits (Bulgaria, Latvia, Lithuania) and those with vulnerable private or public sector balance sheets (Hungary, Romania, the Baltics) are expected to recover more slowly, partly as a result of limited room for policy maneuver."

DB Research's Deuber notes that given that the vulnerabilities in emerging Europe at the onset of crisis were comparable to those in Asia in 1997/98, the needed adjustment was comparable. However, a big difference between then and now is that Asia's problems came when the western economies were booming so Asia could export its way out of recession. "There is a weaker backdrop now, so unlike Asia emerging Europe can't export its way out and 2010 will remain challenging," he said, adding that while the region will profit from the German rebound, he remains rather sceptical about the sustainability of Germany's recovery.

The IMF also points out that even though the banks remained in better shape than most would've thought possible in the months after Lehman Brothers went bust, remaining unresolved issues in the banking sector - such as the need for continued deleveraging to rebuild liquidity and capital buffers, the uncertainty about future bank restructuring, and the need to absorb additional write-downs - will continue to hamper the supply of credit. NPLs aren't expected to peak until later this year. "Growth in the medium term will remain below pre-crisis levels due to moderate growth on the lending side," says UniCredit's Mucci.

The risks are such that the Czech central bank's Zamrazilova warns that the possibility of a double-dip recession in 2010 still looms and the main challenge for the Czech government - and others around the region - remains public finance reform. "It's crucial for future governments to take radical steps," she said.

The IMF has noted that several economies outside of the Eurozone have already undertaken early consolidation (Hungary, Iceland, Latvia, Turkey). "However, across most European economies the key fiscal challenge will be to commit, prepare and communicate credible plans for fiscal consolidation. These should involve moving to sufficiently high primary surpluses in order to place public debt on a stabilizing and, eventually, declining path," the IMF said.

The chance of reform, though, remains limited in a year when so many elections are taking place - something that the markets, already jumpy because of the debt problems of Greece, might start punishing, leading to a full-blown sovereign debt crisis. "Central and Eastern Europe will remain the most vulnerable because this debt overhang, especially the external one, must be rolled over," says Deuber.

With the spreads on Greece's five-year credit default swaps - the cost of insuring against default - on April 26 becoming wider than those of Pakistan, the markets seem in an unforgiving mood.

15. Watch the credibility gap in Europe RBS April 30, 2010

Relief rally should be the name of the game over at least the next trading session as Greece finally signs up to a brutal IMF/EU fiscal austerity programme, which should enable the Iron Chancellor to give way and open the floodgates for IMF/EU cash to at least temporarily wash away market concern Greece over debt sustainability/default and the country's eventual departure from the Eurozone. We assume that the additional austerity measures detailed by the Greek government should be enough to secure the sign off from other EU member state parliaments for the support programme; this is assuming that the Greek parliament agrees all the measures first. The programme may well buy Greece time, but huge challenges remain and the crisis will likely have longer term consequences for the broader region, including Emerging Europe.

First, Greece actually has to implement the measures, and then stay the course on the reform programme, not an easy task given the absolutely brutal level of fiscal austerity demanded in the current programme (10% of GDP plus) and the very difficult starting position; a public sector debt/GDP ratio of 115% will still be acutely difficult to sustain even with the IMF/EU backstop. On this latter note, and given frequent comparisons between Greece and Emerging Markets, I had to really struggle to name an Emerging Market with a debt/GDP ratio this high. Eventually I did come back to Lebanon, which does have a public sector debt/GDP ratio of around 170%; that said it has a huge banking sector/and generous Middle East backers which are much more easy with their cheque books these days than their German brethren. Lebanon is also active in liability management, with a "successful" track record of undertaking debt-swaps to constantly extend the maturity of its public sector liabilities. Maybe this is something that Greece could learn from.

Interesting the reason Greece has such a weighty public sector debt burden is because it has thus far been able to fund it cheaply, given its Eurozone membership and moral hazard play from investors that a Eurozone member was simply too important to fail. In Emerging Market space, with the exception of "special cases" such as Lebanon, no Emerging Market would have been allowed to accumulate such a high level of debt, i.e. they would have been forced to restructure/devalue (perhaps several times), years ago.

In Greece's case, they still have to deliver, and given their lack of a track record of reform, they will have to work hard to (re)build credibility with the market. This will surely make the burden of adjustment that much more difficult -yields could remain higher for longer- , albeit by hopefully putting together a big-ticket programme, the IMF/EU will hope to have bought the Greeks time in the market's eye. The question still remains though is Greece ready for the level of fiscal adjustment and the shear extent of the likely contraction in real GDP; i.e. akin to the Latvian/Hungarian style contractions. And longer term can Greece actually and eventually manage to grow itself out of its debt sustainability problems in a weak European recovery environment; or by signing up to this programme has Greece in effect consigned itself to a decade of recession/zero growth. If Greece is not able to sustain the programme and grow itself out of its current problems then we will be back to talk of debt restructuring (voluntary or even forced), if currency adjustment is to be avoided. This will clearly have bigger ripple down effects for the broader region.

Second, this crisis has exposed fundamental changes in the political balance of power in Europe. Germany has finally emerged from the shadows of WWII and, through Angela Merkel, is now prepared to carry the political weight that her economic standing would justify. The era when France was able to cajole Germany to bow to its lead in Europe would seem to be over, and the ability of the Franco/German voting axis to steamroll the rest must be in demise. Europe just got a lot more interesting, and we are likely to see lots of shifting alliances now, including a greater role for the Central/East Europeans, which interestingly for the Poles and Czechs are much more Eurosceptic, and Atlanticist in outlook. Not sure what this means for Turkey per se, given that both Sarkozy and Merkel, and many of the East European states are not entirely bulls on the Turkey euro accession drive. Arguably the core/fundamental problems at the heart of the Eurozone, which the Greek crisis has exposed, will make European leaders look inwards, trying to put their own house in order first before pushing on with further enlargement. This is though clearly bad news for Turkey and all the countries waiting at the door to enter the European club; admittedly Turkish EU accession is a long term project, with membership unlikely to be seriously considered by both sides for at least a decade yet.

Third, the crisis has exposed a credibility gap not just in Greece, but in the European Union itself. Leadership has been sadly lacking, and decision-making painfully slow. Experience in similar EM crises suggests that markets need decisive action, and the EU political/economic architecture was simply not up to task; it has constantly been behind the curve through this crisis. More fundamentally issues remain at the heart of the Eurozone, i.e. single interest rate does it fit all and also over fiscal federalism. Concerns over the above are likely to linger, long after the Greek bail-out, and this could sap broader confidence in Europe and broader recovery in Europe. Already our European economics team is downbeat about EU/Eurozone recovery and growth, especially versus the US. We expect only 1% growth in the Eurozone in 2010, rising to just 1.3% in 2011, with US growth expected to come in at 3.5% and 4.5% YOY for the two years respectively. Clearly, for Emerging Europe, including Turkey, this weak European core recovery has important implications given typically 60-70% of exports are Europe-bound. Weak European recovery also has implications for the outlook for the Euro, relative to its peers.

16. World Bank sees slow recovery ahead for Emerging Europe and Central Asia World Bank April 26, 2010

The agenda for 2010 - Start strengthening fiscal balances

World Bank Assistance in Time of Crisis

Responding quickly to requests from countries in the Region for help in addressing the crisis, the World Bank more than doubled lending from an average of $3.9 billion in fiscal 2000-08 to $9 billion in fiscal 2009. In fiscal 2010, lending is projected to be $11 billion - $10.5 billion IBRD and $0.5 billion IDA. Much of the new lending came in the form of Development Policy Loans (DPLs) to help countries restore growth and employment (e.g., $1.3 billion for Turkey), rehabilitate the financial sector (e.g., $400 million for Ukraine), address the social impact of the crisis (e.g., $144 million for Latvia), and improve the efficiency of social spending ($1.4 billion for Poland, $200 million for Belarus, and $100 million for Serbia).

In addition, in February 2009, the World Bank Group, the European Bank for Reconstruction and Development (EBRD), and the European Investment Bank (EIB) launched the Joint International Financial Institutions Action Plan, which supports banking systems and lending to the real economy in Central and Eastern Europe. As of end-2009, the institutions have provided more than EURO 19 billion in crisis- related support for financial sectors in the Region. The Bank also participated in the European Bank Coordination Initiative (the Vienna Initiative), a forum for deepening the dialogue between home and host country banking supervisors, private banks, the European Commission, and international financial institutions.

RUSSIA macro news 17. 1Q10 Russian GDP growth reported at 4.5%; NEUTRAL Alfa Bank April 29, 2010

According to the Ministry of Economic Development, Russiaís GDP grew 4.5% y-o-y in 1Q10, exceeding our expectation. Significantly, while real disposable income grew 7.4% y-o-y, retail trade increased only 1.3% y-o-y. Also, as q-o-q economic growth was only 0.6%, the y-o-y figure mainly reflects the base effect.

While the 1Q10 GDP growth was higher than expected, we believe it does not indicate that Russia will be able to accelerate growth in the coming quarters.

As we have previously noted, full-year industrial output is likely to be greater than expected, but it will be driven by growth in export-oriented sectors. Not only are these sectors unable to boost domestic demand, but the individuals are not increasing spending even with disposable income rising relatively quickly. Investments were still down 4.7% y-o-y, suggesting that the recovery in investment activity is lagging our very ambitious 7% y-o-y growth forecast for this year. All in all, we attribute the 4.5% y-o-y growth to the base effect and believe that in 2H10, the pace of economic recovery could slow to 2-3%.

Natalia Orlova

18. April inflation may decline to 0.4-0.5% Alfa Bank April 29, 2010

According to Rosstat, CPI for April 1-26 amounted to 0.3%, meaning the full month inflation will be below the 0.6% seen in March. The continuing deceleration in price growth combined with a slow economic recovery strengthens the argument for an additional cut in the CBR refinancing rate.

In the last several weeks, weekly inflation has been a very modest 0.1%, which resulted in a substantial deceleration in annual CPI from 8.1% to 6.5% in March. At the same time, this month a number of state officials have indicated that signs of a recovery in lending highlight the risk of an upcoming acceleration in CPI, thus pressuring the CBR to stop cutting the refinancing rate, currently at 8.25%.

We, however, argue that a sustainable recovery in lending has yet to be seen, as according to the CBRís preliminary estimates, March growth in loan books excluding Sberbank was just 0.3% m-o-m. Also, taking into account the modest 1Q10 economic growth of 0.6% q-o-q, we believe current real interest rates are too high for Russian companies, which calls for a further reduction in the refinancing rate. The CBR is due to make a rate decision today; we expect another 0.25 bpt cut to 8.0%.

Natalia Orlova

19. CBR drives monetary aggregates via FX interventions Renaissance Capital, Russia Friday, April 30, 2010

Yesterday (27 Apr), the Central Bank of Russia (CBR) released April statistics on monetary aggregates. As of 1 Apr, money supply (M2) reached RUB16.0trn, rising 2.8% from a month before. M2 expanded 32% compared with the same period a year ago. However, this sharp change is largely explained by a low base, due to money supply contraction during the gradual devaluation process in early 2009.

According to CBR methodology, the M2 aggregate does not include credit institution balances in the banking system.

However, occasionally during past months, M2 has fully tracked changes in the broad monetary base, which includes non-cash items such as correspondent accounts, bank deposits and OBRs. Moreover, expansion in those indicators is explained by the volume of FX interventions made by the CBR since the start of the year. The CBR injected around RUB450bn into the system in March, as it purchased $14.5bn and EUR0.4bn from the foreign exchange market.

Another factor that affects the monetary base is budget-related monetary emission, which was not massive due to the traditionally slow pace of budget spending before summer and, thereby, was fully offset by the contraction in commercial banks' liabilities with the CBR (down RUB750bn since the start of the year).

As a result, the M2-to-monetary base multiplier has demonstrated a steady decline in recent months, signalling lending stagnation. In line movements in monetary aggregates also indicate that a unit of monetary base does not produce more than a unit of money supply (click here to view The Russian banking system: What doesn't kill you... dated 26 Apr 2010).

On the one hand, the strong current account surplus points to a favourable liquidity environment in the Russian banking system in the near future. However, on the other hand, we do not see any significant inflation risks at least until 2H10, when we expect budget expenditures to be executed at a much faster pace.

20. Customs duties to decrease gradually BOF April 28, 2010

In the govern-ment meeting discussing customs policy, prime minister Putin said Russia needs to establish a timetable for elimi-nating increases on customs duties imposed during the financial downturn.

Putin said customs duties had been raised during the recession on a limited basis in instances where protection of domestic producers was essential. The hike in import tariffs applied to 10 % of imports coming from outside the CIS area. Import duties were raised e.g. for cars and over 120 machinery and equipment categories. On the other hand, customs duties were lowered on items needed for domestic production such as car parts and video displays. The cut concerned 3 % of imports from outside the CIS area.

The average import tariff rate (taking into consideration lower rates granted in special cases) fell one percentage point last year to 10.6 %. The decline was due largely to special discounts granted on certain import tariffs. The level of import tariffs is expected to decline further this year and next year.

According to the customs policy paper, the two-year postponement of a hike in raw timber export duties com-plies with Russia's national interests, and was justified with a view to enhancing trade relations. In the medium term, the government will have to revisit the issue as it is a decisive factor in building new wood processing capacity and adding value to forest industry exports.

21. Government proposes reducing amount of tax-deductable interest on corporate foreign debt Alfa Bank April 29, 2010

According to media reports, the Finance Ministry and CBR have proposed canceling the 15% p.a. threshold for tax-deductable interest on foreign debt for Russian banks and companies starting in 2011, instead linking it to the refinancing rate. Since the proposal does not distinguish between banks and companies, the new rule would prevent banks from boosting domestic lending by limiting access to long-term funding.

The plan is part of the governmentís effort to discourage foreign borrowing as a way of stimulating domestic lending, which is currently struggling to recover.

However, it should be noted that while Russian banks are currently awash with short-term liquidity, they still lack the long-term funding necessary to increase loan books. Therefore, if foreign borrowing becomes equally unattractive for the entire corporate sector, Russian banks will find themselves unable to satisfy the increased demand from companies, forcing the latter to borrow externally on less favorable terms. Therefore, we are also concerned by the extent of the potential decline in tax- free foreign debt, as a fixed 3% threshold was previously discussed. If the adjustment coefficient results in such a substantial decrease, it will put pressure on the profitability of Russian companies.

22. Interest rates returned to pre-crisis levels in March VTB Capital 26 April 2010

Data excludes Sberbank ó- strong competition from Sberbank and ample liquidity to blame ó continuing attempt to stimulate demand for loans órates to bottom in 2Q10 and restart lending ó neutral

News: Last Friday, the CBR published its March 2010 average lending rates for corporate clients and deposit rates for retail clients for up to 1Y products (the data excludes Sberbank).

Rates on corporate loans dropped to pre-crisis levels: they were down to 11.7% from 12.7% in February.

Average deposit rates declined from 9.9% to 9.1% for term deposits and from 8% to 7.4% for retail clients.

Our View: The statistics are neutral, valuation-wise, for our coverage universe.

The CBR data illustrates the decline in interest rates and the ongoing margins squeeze about which the banks in our coverage universe have been talking. We believe that there is more room to go south, but would expect the rates to bottom in 2Q10 as recent hawkish statements imply little (25bp) if any room for the refinancing rate to go down further.

That said, we believe that demand for loans will return in 2H10, finally bringing fruit to the banksí efforts to restart lending.

23. MinEconomy presents new economic forecasts for 2010-13 VTB Capital 30 April 2010

Mostly positive revisions to 2010 and 2011 indicators --- higher oil price forecast to transform either into smaller budget deficit or higher expenditures

News: Deputy Minister for the Economy Andrey Klepach has announced the new economic forecasts for 2010-13. MinEconomy plans to submit them to the government for discussion on 11 May.

The key changes to the 2010 forecasts include: oil prices revised up to USD 76/bbl (from USD 65/bbl), GDP growth revised up to 4.0% YoY (from 3.1% YoY) and inflation revised down to 6-7% YoY (from 6.5-7.5% YoY). The average USD/RUB forecast for 2009 was revised from 28.3 to 29.0.

Our View: We think that under the new oil price assumption of USD 76/bbl, the 2010 GDP growth forecast is still conservative. We also think that the 2011 CPI forecast is too optimistic as it is largely determined by money supply growth in 2010 and the latter has already accelerated to 32% YoY in March.

The key implication of these revisions to the economic forecast could be a downward revision of the budget deficit (or a hike in budget spending). While the Ministry of Finance has recently been saying that higher oil revenues would be offset by a stronger rouble, the new MinEconomy forecasts suggest a much higher oil price and a weaker USD/RUB.

24. Money supply expands 32.1% y_o_y in March Troika Dialog 28 April 2010

The M2 money supply grew 2.8% m_o_m in March, bringing the y_o_y figure to 32.1%. Such significant growth in y_o_y terms is mostly due to the low base effect. In February_March 2009, banks had only just started to accumulate ruble deposits, and the process was very tentative at first. Given that the money supply started to expand faster later in 2009, we expect the y_o_y figure to start falling. We project that M2 will increase 22_25% this year.

As inflation is still very low, the increase in monetary aggregates can be treated as an indication of economic recovery and a sign that the situation in the financial sphere is normalizing. Meanwhile, the question of budgetary discipline is crucial for the sustainability of future economic development. The government now faces a challenge to see whether it can keep inflation low or even maintain disinflation.

Evgeny Gavrilenkov

25. Official sees no further cuts in refinancing rate till September bne April 30, 2010

Russian Deputy Economic Development Minister Andrei Klepach says that Russia is unlikely to further cut its refinancing rate till September, reports Prime-Tass.

The news agency quoted Klepach as saying that much will depend on the exchange rate and on how banks will react to the Central Bank of Russia's (CBR) current policy.

In another development, Andrei Klepach says that Russia's net capital inflow is expected to be from zero to $10bn in 2010, reports Prime-Tass.

The news agency quoted Klepach as saying that the capital movement forecast for 2011 will depend on the schedule of Russia's debt repayment and Russia's foreign borrowings.

26. Recovery in trade flows continued in Q4 of 2009 and into 2010 OECD April 29, 2010

Merchandise trade volumes continued to grow in the fourth quarter of 2009 in the G7 countries, albeit at a slower pace than in the third quarter. Recent monthly data on merchandise trade values confirm the continued recovery into early 2010. However, both volumes and values of trade remain below their pre- crisis levels of mid-2008. G7 merchandise export volumes grew by 3.9% in the fourth quarter of 2009 and import volumes were up 3.1%. The largest rises were registered in the United States and Japan where export volumes rose by 6.4% and 6.1 %, respectively and import volumes rose by 3.4% and 3.0%, respectively. Compared with a year earlier, G7 export and import volumes were still down 3.3% and 5.7%, respectively. Data for February 2010 point to further growth in G7 merchandise trade values, although exports and import values are still more than 20% below pre-crisis levels. Continued stronger recovery in imports than in exports led to a further widening of the overall G7 trade deficit. In the OECD area as a whole, the value of trade in services also rose in the fourth quarter of 2009, with exports increasing by 6.1% and imports by 4.3% from the previous quarter, although both exports and imports of services rose less rapidly than exports and imports of goods.

27. Russia impacted the most by Greece Downgrade Renaissance Capital, Russia Friday, April 30, 2010

Despite the fact Russia has little sovereign debt (even after its latest external borrowings its debt is 8.0% of GDP), the problems facing European countries are putting massive pressure on Russian eurobonds. The new 10-year Russia-20 lost over 1 ppt to close at 96.50 with its spread over US treasuries expanding to 175 bpts, which is 40 bpts above its placement level. The Russia-30 lost over 1 ppt to close at 113.5. The pressure on Russian sovereign eurobonds in part might be explained by investors' willingness to cover some positions in the new sovereign bonds that were placed prior to the major deterioration we are now seeing in the market environment. Corporate eurobonds also faced major selling yesterday, with Gazprom being the biggest loser. Gazprom 37 lost 2 ppts during the day closing at 100.50-101.0. At the end of last week, Gazprom 37 traded at 106.0. Overall, corporate eurobond liquidity significantly deteriorated on Tuesday, with average bid/ask spreads expanding to 1.5-2.0 ppts. In this environment, we think Sberbank will postpone its new eurobond placement (the bank announced its eurobond placement plans yesterday).

28. Russia won't replenish reserve fund in 2010 bne April 27, 2010

Russia's Deputy Prime Minister and Finance Minister Alexei Kudrin says that the Russian government is not going to replenish its Reserve Fund in 2010, reports Prime-Tass.

The news agency quoted Kudrin as saying that the fund will not be replenished this year.

In the meantime, Anton Abugov, Vice President of Russian industrial conglomerate AFK Sistema says that the company is not going to repay the debt of Russian oil company RussNeft, reports Prime-Tass.

The news agency quoted Abugov as saying that Sistema, which in late March reached an agreement to buy a 49% stake in RussNeft, has yet to close the deal.

In another development, Anatoly Chubais, the head of Russian Corporation of Nanotechnologies, or Rusnano, says that the corporation plans to make borrowings before its reorganization into a joint-stock company from state corporation, reports Prime-Tass.

The news agency quoted Chubais as saying that Rusnano initially planned to offer bonds worth up to RUB50bn.

29. Russia's fedl budget deficit at RUB169.5bn January-February bne April 30, 2010

The Federal State Statistics Service says that Russia's federal budget deficit amounted to RUB169.5bn in January-February, reports Prime-Tass.

Citing the statistics service, the news agency says that budget revenue amounted to RUB1.308 trillion in this period, while budget spending was RUB1.478 trillion.

In the meantime, Ipotechny Agent AIZhK 2010-1, a special purpose vehicle (SPV) of Russia's government-owned Mortgage Agency(AIZhK), plans to offer two mortgage bonds totaling RUB12.192bn, reports Prime-Tass.

Citing a statement issued by the company, the news agency says that the bonds are expected to be offered privately to AIZhK at face value. Each issue is worth RUB6.096bn at face value.

In another development, the Russian government's foreign debt fell 3.1% in January-March to $36.484bn as of April 1, Prime-Tass.

30. Russia, China set to organize yuan, ruble exchange trading bne April 30, 2010

Viktor Melnikov, the deputy chief of Russia's Central Bank says that Russia and China have agreed on the necessity of organizing exchange trading in their currencies, reports Interfax.

The news agency quoted Melnikov as saying that the Russian and Chinese sides agreed that it is necessary to move to concrete steps in the organization of exchange trading in the yuan and ruble.

RUSSIA bonds 31. Alfa-Bank: FY09 results review Renaissance Capital April 26, 2010

On Friday (23 Apr), Alfa-Bank (S&P: B+, Moodyís: Ba1) released a presentation with some of the bank's key FY09 figures. Alfa-Bank will publish its full accounts and host a conference call discussing its FY09 performance today. Some of our key takeaways from Alfaís presentation are:

Net profit increased to $77mn for FY09 from $6mn in 1H09. However, the key result, in our view, is a sharp compression of net interest income, resulting from a loan book decline. Over FY09 the bank posted positive securities trading figures, which supported its profitability, but its core 2H09 banking profits were only marginal.

Alfa-Bank was one of the first privately owned banks to publicly recognise the degree of its asset-quality issues, and as a result charged a massive amount of provisioning as early as in 2H08-1H09. In 2H09 its provisioning costs dropped visibly. The presentation clearly shows that most of the bankís loan delinquency metrics significantly improved in 2H09 and 1Q10.

One of the key messages of the presentation, as well as in other speeches made by Alfa's management, is the bank intends to focus on rebuilding its lending business franchise in 2010-2011.

On aggregate, in our view, the results are not market-moving and we do not expect them to have any material influence on Alfaís bonds.

Maxim Raskosnov

32. Alliance Oil Company to offer bonds totaling RUB20bn bne April 29, 2010

Russia's Alliance Oil Company plans to offer four 10-year bond issues totaling RUB20bn, reports Prime-Tass.

Citing a statement issued by the company, the news agency says that the company plans to offer its third and fourth bond issues worth RUB5bn each, its fifth bond issue worth RUB3bn and a sixth bond issue worth RUB7bn.

In the meantime, Eurochem decided not to place RUB10bn worth of debut bonds (the rate target was 8.5-9% annual), reports local media.

Reports suggest that the bid book was closed on April 27.

33. Gazprombank can place Eurobonds in autumn bne April 28, 2010

Alexander Kaznacheev, the First Vice-President of Gazprombank, says that the bank can place Eurobonds in autumn, reports local media.

Kaznacheev was quoted as saying that most likely, we will borrow in autumn this year.

In the meantime, Tinkoff Credit Systems Bank (TCS-Bank) is one of the banks hit by mortgage fraud of Goldman Sachs Investment Bank which lost about $1bn, reports local media.

Oleg Tinkov, Chairman of the Board of Directors and a majority owner of the bank, was quoted as saying that TCS-Bank purchased this notorious knockout hedge option from Goldman Sachs.

In another development, the European Emerging Market Banks Credit Trends and Industry Outlook in 2010, says that the share of troubled loans at Russian banks (overdue by over 90 days and restructured) will reach the peak of 25% in the second half of 2010, having increased from 20% at the end of 2009, reports local media.

Reports suggest that restructured loans account for nearly a half of all troubled loans at the moment.

In another development, over the past year, the value of assets of major Russian financial and industrial groups has remained nearly unchanged, reports local media.

Reports suggest that in 2008, the investment portfolio of Renova owned by Viktor Vekselberg more than halved in price (from $17.3bn to $7.5bn; net of debt).

34. HCFB sets coupon rate for RUB5bn bonds at 9% bne April 28, 2010

Russia's Home Credit and Finance Bank (HCFB) has set the first coupon rate for a RUB5bn bond issue at 9%, reports Prime-Tass.

Citing a statement issued by the bank, the news agency says that HCFB plans to start offering the bond issue publicly on the Moscow Interbank Currency Exchange (MICEX) in 1,000-ruble denominations on Thursday.

In another development, the money supply in Russia, the M2 aggregate in national definition, less deposits in foreign currency, increased 1.9% in the first quarter of 2010, from RUB15 trillion 697.7bn as at January 1 to RUB 15 trillion 996.5bn as at April 1, 2010, reports local media.

Reports suggest that in March, the money supply increased 2.8%.

35. Mechel says fully placed RUB5bn exchange bond bne April 28, 2010

Russian mining and metals group Mechel has placed a RUB5bn 3-year exchange bond, reports Prime-Tass.

The news agency says that the bonds were offered publicly in 1,000-ruble denominations on the Moscow Interbank Currency Exchange (MICEX).

In the meantime, Vladimir Shmatovich, a Deputy Director at TMK, says that the company can enter Eurobonds market in 2010 and considers possibility of SPO, reports local media.

Shmatovich was quoted as saying that management of the company recommended to distribute dividends over 2009 in order to retain money in the company and to channel efforts for the reduction of the debt load. In late 2009 the net debt of the company 2009 amounted to $3.5bn.

In another development, VEB has set the rate of the first coupon of the second series of currency-denominated bonds at 1,48% annual, reports local media.

Reports suggest that the placement of securities worth $1bn was scheduled for April 27, 2010 by closed subscription among Russian banks at MICEX.

36. MTS repurchases RUB 7.1bn of its bond issue VTB Capital 27 April 2010

Not meaningful for operatorsí ability to make further debt repayment.

News: MTS announced yesterday that it had repurchased 71% (RUB 7.1bn or USD 244mn) of its first bond issue during the put offer executed by the bond holders.

Our View: The news is neutral for MTS as the partial repurchase of the bond issue does not significantly impact the operator's ability to repay its debt in the near term. This amounts to USD 1.7bn in 2Q10-4Q10 for MTS stand alone without Comstar UTS, of which around USD 0.9bn is put options on the operatorsí bonds (including the aforementioned amount), while the operator had USD 2.3bn of cash by the end of 2009.

37. Russia's Sverdlovsk Reg to offer RUB3bn bonds in 2010 bne April 29, 2010

Mikhail Maksimov, the economy minister for Russia's Sverdlovsk Region says that the region government plans to offer bonds worth RUB3bn in 2010, reports Prime- Tass.

The news agency quoted Maksimov as saying that previously the government planned to offer a RUB7bn bond issue.

In the meantime, Sberbank is about to start a road show of Eurobonds in May, reports local media.

Reports suggest that there will be "windows" in any case despite the volatility in the market, and the bank will be able to easily raise $0.5-1bn.

In another development, Russia's Loko Bank plans to offer a fifth, RUB2.5bn 5-year bond issue, reports Prime-Tass.

Citing a statement issued by the bank, the news agency says that the bank plans to offer the bonds publicly in 1,000-ruble denominations at face value on the Moscow Interbank Currency Exchange (MICEX).

In another development, Russia's uncut diamond monopoly Alrosa plans to offer two 5-year bond issues worth a total of RUB15bn, reports Prime-Tass.

Citing the company, the news agency says that in particular, the company plans to offer an RUB8bn bond issue and a RUB7bn bond issue publicly in 1,000-ruble denominations.

38. Sberbank to place Eurobonds in May Troika, Russia Wednesday, April 28, 2010

Sberbank plans to conduct a road show and place Eurobonds in May, newswires report.

Although we do not see an immediate need for such a move, as the bank's organic funding covers its needs and liquidity is ample to repay subordinated debt to the Central Bank, the management is probably willing to fix cyclically low dollar interest rates to secure long term financing, which is still scarce domestically, as well as retain its presence on debt markets.

Since end 2009, both private and state Russian banks have been very active in Eurobond issuance, following more than a year of closed debt markets, mainly covering refinancing needs and fueled by plentiful available liquidity internationally. Such quasi Sovereign names as VTB, Russian Agricultural Bank and Bank of Moscow have conducted very successful placements, and we expect demand for Sberbank debt to be strong as well.

Sberbank is considered to be the strongest name in the space, with its Eurobonds trading generally in line with the Sovereign curve, probably due in part to the scarcity of the credit. We think that the bank will seek to place a 5y or 10y benchmark size issue, which will likely be placed flat with the secondary market curve.

Andrew Keeley

39. TMK reports FY09 results; expects a better 2010 Renaissance Capital April 26, 2010

On Friday (23 Apr), TMK reported its 2009 financials. The companyís 2009 sales were $3.46bn (-39% YoY), while shipments were 14% lower YoY at 2.8mnt. On the back of higher shipments in 2H09 (+30% HoH) TMKís profitability improved, with EBITDA rising 75% HoH to $215mn. However, the companyís 10.8% EBITDA margin remains well below the 20% pre-crisis range. Net debt in 2H09 was broadly flat, at $3.5bn. TMKís release of working capital ($376mn) in 2H09 was the main contributor to operating cash flow, which allowed the company to cover $235mn of interest payments and $231mn of capex.

TMK provided quite a positive outlook for its 2010 operations. The company expects YoY shipments in 2010 to be 20% higher, or 3.35mnt. The company also expects continued strong demand for LD pipes due to the implementation of large pipeline projects, and it plans to maintain 4Q09 LD pipe shipment levels throughout 2010, or roughly 600,000 tonnes for FY10. TMK-IPSCOís capacity utilisation increased 70% thanks to high demand for OCTG pipes in North America from the shale gas segment. TMKís 1Q10 sales and EBITDA were $1.3bn and $0.2bn, respectively, based on management accounts. TMK plans a 10-15% price increase for oil and gas pipes in 2Q10 in Russia. TMKís ability to pass raw materials price increases onto customers will be the main factor of its profitability in 2010 along with retaining high capacity utilisation.

Overall, even if we factor in significant improvement in TMKís operating environment, the company is likely to remain significantly leveraged. Interest expense on $3.75bn of gross debt will eat into the companyís EBITDA. Furthermore, with higher input prices and capacity utilisation, working capital is likely to increase in 1H10. Hence, subject to capex spending, TMKís ability to deleverage in 2010 might be questionable, we think. The companyís $1.5bn of short-term debt exposes it to refinancing risks, which are currently mitigated by abundant liquidity in the banking system and increasing competition among banks for borrowers.

Andrey Markov

40. VEB places $1bn domestic foreign currency-denominated bonds bne April 27, 2010

Russia's state-owned Vnesheconombank (VEB) fully placed its second domestic foreign currency-denominated bond issue worth $1bn on Tuesday, reports Prime- Tass.

Citing the bank's press office, the news agency says that the bonds have a maturity of one year and carry semiannual coupons with a rate of 1 percentage point over 6- month Libor.

In the meantime, Alexander Yakovlev, the Deputy CEO of Russia's Ust-Luga Company says that the company plans to offer bonds worth RUB1.5bn in June, reports Prime-Tass.

The news agency quoted Yakovlev as saying that the company is planning to have the bonds guaranteed by the Leningrad Region government.

In another development, VTB Bank plans to launch an Islamic bond worth about $200mn in the second half after postponing from last year, reports The Moscow Times.

Citing an unnamed source familiar with the deal, the news agency says that VTB has cut the size of the sukuk, or Islamic bond, from an original target of $300mn.

In another development, the board of directors of Russian telecommunications group Synterra has approved offering two exchange bond issues worth a total of RUB7bn, reports Prime-Tass.

Citing a statement issued by Synterra, the news agency says that the projected timeline for the offerings was not provided.

RUSSIA loans 41. Gazprom took out $367mn loan from Citibank in February bne April 29, 2010

Russian natural gas monopoly Gazprom took out an 11-year $367mn loan from Citibank N.A. in February, reports Prime-Tass.

Citing a financial report under International Financial Reporting Standards (IFRS) issued by the company, the news agency says that the annual interest rate for the loan amounted to 1.6% above Libor.

In the meantime, Gazprom Chief Financial Officer Andrei Kruglov says that the company plans to cut its debt by $3bn in 2010, reports Prime-Tass.

The news agency quoted Kruglov as saying that the debt of Gazprom and its subsidiaries is expected to fall by $1bn in 2010.

42. North Ossetia receives RUB1.47bn loan from VTB Bank bne April 30, 2010

Russia's constituent republic of North Ossetia-Alania has taken out a RUB1.47bn loan from a local branch of state-controlled VTB Bank, reports Prime-Tass.

Citing the bank's press office, the news agency says that the republican government plans to use the funds to finance budget spending and to redeem the government debt.

In the meantime, Russian Deputy Finance Minister Dmitry Pankin says that Russia's Finance Ministry plans to replace $13bn worth of the government's foreign borrowings with domestic borrowings in 2010, reports Prime-Tass.

The news agency quoted Pankin as saying that they are cutting foreign borrowing by $13bn and increasing domestic borrowing by the same amount.

43. Tatneft long-term debt increases 78% in 2009 bne April 30, 2010

Russian oil company Tatneft's long-term debt rose 78% in 2009 to RUB79.83bn as of December 31, 2009, reports Prime-Tass.

Citing a statement issued by the company, the news agency says that the company attributed the increase to a $2bn loan taken out to finance the construction of its TANEKO petrochemical complex.

44. VTB may extend Ukrainian Finance Ministry $500mn bne April 30, 2010

Russian Prime Minister Vladimir Putin says that if Ukraine is interested, VTB is prepared to extend a credit of up to $500mn, reports Interfax.

The news agency quoted Putin as saying that one of our biggest banks, VTB, has had talks with Ukraine's Finance Ministry and if the Ukrainian side is interested is ready to extend a credit of up to $500mn to the Finance Ministry in the nearest future.

RUS RATINGS 45. Alfa MTN Issuance Ltd. $600 Million 8% Senior Notes Due March 18, 2015, Rated 'B+' S&P April 26, 2010

MOSCOW (Standard & Poor's) April 23, 2010--Standard & Poor's Ratings Services said today that it had assigned its 'B+' rating to the $600 million guaranteed senior unsecured notes due March 18, 2015, issued by Alfa MTN Issuance Ltd. (Alfa MTN), a special-purpose vehicle incorporated with limited liability in Cyprus.

The rating on the notes is based upon our assessment of the guarantee by OJSC Alfa-Bank (Alfa-Bank; B+/Stable/B; Russia national scale 'ruA+') of the principal payments due under the notes and the terms of a deposit agreement, pursuant to which Alfa-Bank is expected to make payments to Alfa MTN in amounts and at such times as we believe will be sufficient to enable Alfa MTN to pay interest on the notes.

In our opinion, Alfa MTN will act as a pass-through vehicle pursuant to which it will rely on payments from Alfa-Bank under the guarantee and the deposit agreement to pay principal and interest to the noteholders on a full and timely basis.

The principal payments of the notes are expressly guaranteed by both Alfa-Bank and ABH Financial Ltd. (ABH; not rated, incorporated with limited liability in the British Virgin Islands; the ultimate owner of Alfa-Bank). Interest payments under the notes are expressly guaranteed only by ABH. Our rating relies on principal payments to be made by Alfa-Bank pursuant to the guarantee and interest payments to be made by Alfa-Bank pursuant to the deposit agreement.

Standard & Poor's will monitor the servicing of the deposit by Alfa-Bank and servicing of the notes by Alfa MTN. Any disruption of these payments will lead us to lower the counterparty credit rating on Alfa-Bank to 'SD' (selective default).

In addition, Alfa-Bank has informed us that it intends to limit the activities of Alfa MTN to the issuance of Eurobonds. If Alfa MTN were to engage in other unrelated business activities, the rating could be affected to reflect the effect we believe those activities could have on its ability to pay principal and interest on the notes.

46. Moody's assigns Baa1 rating to Russia's new Eurobond Moody's April 30, 2010

Moody's Eastern Europe has assigned its Baa1 rating with a stable outlook to the Russian Federation's two new US dollar-denominated Eurobonds, which totaled $5.5 billion. The bonds are Russia's first sovereign Eurobond issuance in more than a decade.

The rating agency pointed out that the revival of the global economy is having a positive impact on the Russian economy, which shrank by nearly 8% in 2009. "Evidence suggests that the corner has now been turned," says Dietmar Hornung, Vice President-Senior Credit Officer in Moody's Sovereign Risk Group. "The impact of higher oil prices has returned the balance of payments to surplus, causing the exchange rate to appreciate and helping combat still-high inflation."

Moreover, Mr. Hornung said that the government is upgrading its forecasts for growth and lowering its estimates for the budget deficit and the public sector borrowing requirement for 2010-2012, reflecting higher oil prices and global growth. Moody's own forecasts call for Russia's economy to grow almost 4% this year and still faster in 2011.

"The government has a light public sector debt servicing burden and ample foreign currency reserves," said Mr. Hornung. "If government spending can be reined in, the recovery of oil prices will allow the government's oil fund assets to be rebuilt gradually. However, Moody's remains concerned that some of the spending increases involved in last year's anti-crisis package were structural in nature and therefore hard to cut back."

Moody's analysis indicates that risk from the financial sector could be contained without severely impairing the government's creditworthiness. Moody's outlook for the Russian banking system could also be changed to stable in the second half of this year, said Mr. Hornung.

The last rating action on Russia was implemented on 12 December 2008, when Moody's changed the outlook on the Baa1 government bond ratings to stable from positive.

47. Moody's withdraws Krai of Krasnodar's (Russia) ratings Press release April 27, 2010

Moody's Investors Service has today withdrawn the Ba1 local currency issuer rating with stable outlook for the Krai of Krasnodar (Russia). At the same time, Moody's Interfax Rating Agency has withdrawn Krasnodar Krai's Aa1.ru national scale rating. Moscow-based Moody's Interfax is majority-owned by Moody's, a leading global rating agency. The ratings have been withdrawn for business reasons. Please refer to Moody's Withdrawal Policy on www.moodys.com.

Moody's last rating action on the Krai of Krasnodar was implemented on 18 September 2007, when the rating agencies assigned a Ba1 issuer rating with a stable outlook and Aa1.ru national scale rating to the region.

The principal methodologies used in rating the region are "Regional and Local Governments Outside the US" and "The Application of Joint-Default Analysis to Regional and Local Governments", which can be found at www.moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab. Other methodologies and factors that may have been considered in the process of rating the city can also be found in the Rating Methodologies sub-directory on Moody's website.

48. Russian Corporation of Nanotechnologies Outlook Revised To Stable On Strong Ongoing Support; Affirmed At 'BB+/B/ruAA+' Press Release April 29, 2010

· We expect strong ongoing state support to be provided to Russian Corporation of Nanotechnologies (RusNano) in the next few years. · We expect a "high" probability of extraordinary timely government support if necessary. · We are revising our outlook on RusNano to stable from negative and affirming our 'BB+' long-term, 'B' short-term, and 'ruAA+' national scale ratings on RusNano.

MOSCOW (Standard & Poor's) April 29, 2010--Standard & Poor's Ratings Services said today that it had revised its outlook on Russian Corporation of Nanotechnologies (RusNano) to stable from negative. RusNano is a state investment institution established by the government of the (foreign currency BBB/Stable/A-3; local currency BBB+/Stable/A-2; Russia national scale 'ruAAA'). At the same time we affirmed our 'BB+' long-term and 'B' short-term issuer credit ratings and our 'ruAA+' Russia national scale rating on RusNano.

"The outlook revision reflects strong ongoing support expected from the Russian government at least until 2012 in the form of capital injections and guarantees until 2015," said Standard & Poor's credit analyst Boris Kopeykin.

We use our criteria for government-related entities in rating RusNano. In spite of the recent government decision to change RusNano's legal status from a state corporation to a joint-stock company (in 2010-2011), we believe there is a "high" likelihood that it would receive timely, extraordinary support from the state in case of financial distress. Our opinion is based on RusNano's: · "Important role" for the government of Russia. The government created RusNano to support state policies on promoting economic diversification into innovative sectors. The corporation is supposed to invest in projects that apply nanotechnology and promote such investments in the market. It is one of the main tools of economic diversification in high-tech industries now used by the government. RusNano selects and provides financing in the form of capital injections, loans, and guarantees to start-ups in the sector. The government has approved regular large equity injections for RusNano until 2012. The company's capital is likely to reach Russian ruble (RUB) 130 billion (almost $5 billion at that moment$)--the equivalent of about 0.3% of Russia's GDP--by year-end 2012; and · "Very strong" link with the Russian government, its full owner. RusNano will be transformed into a joint-stock company in 2010-2011, but privatization is not expected. The government is tightly monitoring RusNano, and several Russian ministers sit on the board. The government announced its plans to guarantee RusNano's expected bond issues of RUB182 billion in 2010-2015, including RUB53 billion in 2010. Politically it is a very visible entity.

The stable outlook balances our expectations of a "high" probability of timely extraordinary support and currently strong ongoing support with the uncertainty regarding RusNano's relationship with the state in the longer term, and still further uncertainties about the viability of the applied business model.

"Confirmation of the government's strong ongoing support to the company, and of the availability of timely extraordinary support to the company in an emergency in the longer term, might result in an upgrade," said Mr. Kopeykin.

In contrast, a downgrade might result if we observe signs of weakening ongoing or lower chances of timely extraordinary support. Additional pressure might come from larger-than-expected borrowings, particularly borrowings with only up to three-year maturities, and deterioration of the liquidity position, which we don't currently expect.

49. Russian Irkutsk Oblast Outlook Now Positive On Possible Higher Revenues And Improved Market Sentiment; Affirmed At 'B' Press Release April 29, 2010

Irkutsk Oblast, located in Eastern Russia, has demonstrated strong commitment to cost-containing measures and conservative revenue planning. Together, these could result in moderately sound budgetary performance and a lower debt burden in 2010-2012. We are therefore revising our outlook on the Irkutsk Oblast to positive from stable and affirming our 'B' long-term rating on the oblast.

MOSCOW (Standard & Poor's) April 29, 2010--Standard & Poor's Ratings Services said today that it had revised its outlook on Irkutsk Oblast to positive from stable based on the oblast's commitment to cost-containing measures amidst economic difficulties and conservative revenue planning. At the same time, we affirmed our 'B' long-term issuer credit rating.

The rating on the Irkutsk Oblast, located in Eastern Siberia in the Russian Federation (foreign currency BBB/Stable/A-3; local currency BBB+/Stable/A-2; Russia national scale 'ruAAA') is constrained by the oblast's limited financial flexibility, high operating and capital-expenditure pressure, high contingent liabilities, and still modest-- although improved--liquidity.

On a positive note, the oblast government's ability and willingness to take cost- containing measures to improve budgetary performance and lower the debt burden, as well as its diversified economy with long-term growth potential, support the oblast's credit quality.

"The positive outlook reflects our expectations that Irkutsk Oblast might receive higher-than-expected revenues if already established taxpayers increase profit tax allocations to the budget due to rebounding commodity prices or if investments in new enterprises result in significant tax proceeds," said Standard & Poor's credit analyst Felix Ejgel. "Moreover, currently positive sentiments in the Russian domestic capital market could allow the region to smooth its debt repayment schedule."

Should the oblast achieve better-than-planned operating budgetary performance that would allow it to either reduce its contingent liabilities or increase capital investments without deterioration of its debt burden, we could raise the rating. An improved liquidity position, through building up its cash reserves, arranging medium- term committed credit facilities, or further reducing annual debt service, could also lead to a positive rating action.

Conversely, the oblast's failure to recover an adequate liquidity position; faster-than- planned operating-expenditure growth, which could stem from political or social pressure on the government; or resumed negative capital market sentiment leading to predominant reliance on short-term borrowings could lead us to revise the outlook to stable.

50. Russian Tomsk Oblast Upgraded To 'B/ruA-' On Anticipated Debt Reduction, Moderate Budgetary Performance; Outlook Pos Press Release April 30, 2010

In our view, cost-containing measures and availability of soft loans from the federal government will enable Tomsk Oblast, in Western Siberia, Russia, to maintain moderate budgetary performance and gradually reduce its debt burden in 2010- 2012. We are raising the ratings on the oblast to 'B/ruA-'. The positive outlook reflects our expectations that the oblast could extend its debt maturity profile and ensure committed facilities to further mitigate refinancing risks, and achieve higher-than-expected revenues in 2010.

MOSCOW (Standard & Poor's) April 30, 2010--Standard & Poor's Ratings Services said today that it had raised its long-term issuer credit and Russia national scale ratings on Russian Tomsk Oblast to 'B/ruA-' from 'B-/ruBBB'. The outlook is positive.

"The upgrade reflects our view that Tomsk Oblast's cost-containing measures and the availability of soft loans from the federal government will enable the oblast to maintain moderate budgetary performance and gradually reduce its debt burden in 2010-2012," said Standard & Poor's credit analyst Felix Ejgel.

The ratings reflect our view that the oblast's liquidity is still lower than adequate, and of its limited financial flexibility and predictability and dependence on volatile commodity markets.

However, the oblast has demonstrated a commitment to timely debt repayment and it maintains a moderate debt level. Moreover, the oblast received significant support from the federal government in the form of soft budget loans in 2009 and 2010.

"The positive outlook reflects our expectations that Tomsk Oblast's currently good access to bank lending and capital markets could allow it to extend its debt maturity and contract committed facilities, thereby further limiting its refinancing risks," said Mr. Ejgel.

In addition, currently high commodity prices and support from the federal government might help the oblast achieve higher-than-expected revenues in 2010.

Further mitigation of refinancing risks--either through debt reduction and build up of a cash cushion or better budgetary performance--will be positive for the ratings.

We could revise the outlook to stable if the oblast fails to keep its fiscal policy tight and its operating balance deteriorates significantly, or if its internal and external liquidity positions further deteriorate, for example, as a result of tighter domestic market conditions.

51. Russian Yamal-Nenets Autonomous Okrug Now Investment Grade At 'BBB-/ruAAA'; Outlook Stable Press Release April 30, 2010

The new management of Russian Yamal-Nenets Autonomous Okrug (YANAO) displays good prospects for continued solid budgetary performance, excellent liquidity, and zero to modest debt. We are therefore raising our ratings on YANAO to 'BBB-/ruAAA'. The stable outlook reflects our expectation that YANAO will stick to cautious expenditure and debt policies and maintain a sound liquidity position in the next two to three years.

MOSCOW (Standard & Poor's) April 30, 2010--Standard & Poor's Ratings Services said today that it had raised its long-term issuer credit rating on Yamal-Nenets Autonomous Okrug (YANAO) located in the Russian Federation to 'BBB-' from 'BB+' and its Russia national scale rating to 'ruAAA' from 'ruAA+'. The outlook is stable.

"The upgrade reflects our view of YANAO's good prospects of continued solid budgetary performance, improved liquidity, and the continuity of cautious debt policies," said Standard & Poor's credit analyst Karen Vartapetov.

Supporting the ratings are the okrug's zero to very modest direct debt, a very strong liquidity position, large gas reserves, high wealth indicators, and a robust financial performance.

The okrug's high dependence on its major taxpayer, OAO Gazprom (BBB/Negative/A- 3); limited revenue predictability; and uncertainties about its institutional status constrain the ratings.

"The stable outlook reflects our expectation that, despite modest prospects for economic growth and ongoing spending pressures, YANAO will likely maintain solid a budgetary performance thanks to continued cautious expenditure policies over the next two to three years," said Mr. Vartapetov.

The outlook also incorporates our expectation that the okrug will maintain a sound liquidity position and accumulate only marginal--if any--debt.

We might raise the ratings following a gradual enhancement of YANAO's contingency fund allocation procedures, which would likely mitigate revenue volatility. A higher predictability of intergovernmental relations and the taxation system in Russia could also lead to improvements in the okrug's credit standing and a possible positive rating action.

We might lower the ratings if YANAO's revenues were to erode and were not offset by expenditure cuts, resulting in a structural drop in operating balances, depletion of cash reserves, and accumulation of short-term debt.

UKRAINE RATINGS 52. Fitch rates Privatbank's upcoming Eurobond B Dragon Capital, Kyiv April 28, 2010

Fitch assigned a preliminary long-term rating of B- to Privatbank's upcoming Eurobond issue. The notes are expected to have a maturity of five years. (Fitch) The Eurobond agreement will contain a set of covenants, including limitations on disposals, mergers and other types of corporate reorganizations by Privatbank and its material subsidiaries. A negative pledge clause allows for a creation of a lien (including securitization) on up to 35% of Privatbank's total assets. Privatbank and any of its banking subsidiaries also commit to comply with the minimum required capital adequacy ratio of 10% set by the NBU.

According to the terms of the loan agreement, a cross default is triggered if Privatbank or any of its subsidiaries default on debt exceeding $20m.

Privatbank's two outstanding Eurobonds with a combined issuance volume of $750m and maturing in 2012 and 2016 are currently trading at 95.5-98.5% of face value, yielding 8.9- 10.3%, or close to their estimated fair value. We think Privatbank could tap the market with a $500m issue in the 9.6-9.8% yield range, or a 150bp premium to Ukreximbank 15s.

Olga Slyvynska

KAZAKH RATINGS 53. Fitch Assigns Kazatomprom's Notes Expected 'BBB-' Rating Fitch press release April 27, 2010

Fitch Ratings has [April 27] assigned JSC National Atomic Company Kazatomprom's (Kazatomprom) proposed notes an expected senior unsecured rating of 'BBB-'.

The notes will comprise unsecured and unsubordinated obligations of Kazatomprom and will rank equally with the company's existing and future unsecured and unsubordinated obligations. Kazatomprom is rated Long-term foreign currency Issuer Default Rating (IDR) 'BBB-' and Short-term foreign currency IDR 'F3' by Fitch. The Outlook on the Long-term IDR is Stable.

The final rating on the notes is contingent on the receipt of final documentation conforming to information already received.

The notes will be governed by English law and have the benefit of negative pledge and cross default clauses.

Kazakhstan-based Kazatomprom is one of the largest uranium producers in the global uranium market. It is ultimately 100% state-owned. The current Long-term foreign currency IDR represents a stand-alone view of the company, which at present is at the same level as Kazakhstan's sovereign ratings.

54. Fitch changes Tristan Oil's rating watch to ‘Evolving’ from ‘Negative’ Visor Capital April 27, 2010

Fitch maintained the Company’s IDR rating at ‘C’. As we believe the change reflects events that are already known to the market, we do not expect any significant bond price impact.

Fitch Ratings yesterday changed its rating watch on Tristan Oil’s Long-term foreign currency Issuer Default Rating (IDR) of 'C', to Evolving (RWE) from Negative. The change is due to progress regarding the potential sale of the Company’s two operating companies - Kazpolmunay and Tolkynneftegaz - to Cliffson Company SA, which management expects in the near term. The ratings agency noted, however, that there is still very little information regarding the deal or the potential acquirer.

As previously reported in February 2010, Tristan announced that it had reached an agreement on the sale of its Kazakh assets to Cliffson Company, a group which is reported to be owned by Kazakh interests. The deal is subject to a number of waivers and approval from the Kazakh authorities, settlement of a short-term loan facility issued by Laren, as well as some waivers from the bondholders.

We do not expect any bond price impact for the Company. We currently do not have Tristan Oil under formal research coverage.

55. Fitch: Servicing Concerns of Kazakh MBS Expose Risks in EMEA SF Fitch press release April 27, 2010

Fitch Ratings says in a special comment [April 26] that the servicing issues affecting the Kazakh Mortgage Backed Securities 2007-1 B.V. (Kazakh MBS) transaction, particularly relating to the invocation of the stand-by servicing agreement, may not be limited to emerging markets transactions and expose operational and potential credit risks inherent in EMEA structured finance (SF) transactions.

"The trustee's reluctance to transfer servicing to the stand-by servicer in the Kazakh MBS deal and the back-up servicer's attempts to renege on its obligations are not particularly surprising or unique, as the migration of any servicing portfolio from one entity to another involves risks that are further exacerbated when the involved parties are resistant to such action," says Edward Register, Senior Director, EMEA Structured Finance Operational Risk Group at Fitch.

From the trustee's perspective, maintaining the servicing of Kazakh MBS with BTA Ipoteka (BTAI), a subsidiary of Kazakhstan's second-largest bank, BTA Bank (Restricted Default), is preferable to initiating a transfer to an unwilling back-up servicer such as Halyk Bank of Kazakhstan (rated 'B+'/Stable'B'), particularly given the type of loans in the portfolio which Halyk claims it cannot service.

Fitch believes such issues to be minimal in more advanced economies with well- developed mortgage markets and sophisticated servicing environments. However, while there are some transactions in EMEA markets where the stand-by servicer has a right of refusal following invocation of the stand-by arrangement, such a provision does not exist for Halyk.

Fitch believes that should the trustee in the Kazakh MBS example have to enforce the stand-by agreement, Halyk would be contractually obligated to assume the servicing role or face potential legal action. Such action would likely involve noteholders, particularly if a prolonged servicing disruption significantly impacted transaction performance.

"Fitch views back-up servicing arrangements as an appropriate mitigant to servicing disruption events triggered by a servicer default. However, to fully capitalise on the stand-by arrangement, the agreement needs to be legally binding and the back-up servicer needs to be able to effectively service the types of loans included in the relevant transaction," adds Register.

56. Moody's assigns (P)Baa3 rating to the Notes of Kazatomprom Moody's April 30, 2010

Moody's Investors Service has today assigned a (P)Baa3 rating to the Senior Unsecured Notes to be issued by JSC National Atomic Company's (Kazatomprom) with a stable outlook.. Upon a conclusive review of the transaction and associated documentation, Moody's will assign a definitive rating to the Notes. A definitive rating may differ from a provisional rating. The Notes will be denominated in US dollars and the proceeds to be used on general corporate purposes. Moody's comments in particular that the definite rating of the Notes is based on the Moody's assumption that:

- the level of priority debt in the current debt structure of KAP will not exceed a range of 25 to 30 % at the outset and will be gradually reduced to below 20% over the intermediate term, as the current level of the structurally senior debt makes the rating of the Notes weakly positioned in its rating category

- the Notes proceeds are expected to be prudently invested in EBITDA generative assets in accordance with guidance provided by the company.

By virtue of its current ownership structure (100% owned by the Government of Kazakhstan via NWF Samruk-Kazyna), Kazatomprom is considered a government- related issuer (GRI). Thus, in accordance with Moody's GRI rating methodology, the ratings of Kazatomprom and of the proposed notes incorporate uplift from Kazatomprom's standalone credit quality measured by a Baseline Credit Assessment (BCA) of 12 (on a scale of 1 to 21 and equivalent to Ba2). The uplift to the BCA is driven by the credit quality of the state, as the sole shareholder, and Moody's assessment of high likelihood of support from its ultimate shareholder in the event of financial distress, as well as medium default dependence between the company and the state.

Though Moody's acknowledges that the company had a solid year 2009 with reasonably strong credit metrics, the agency commented that the size of the planned issue reflects rather ambitious plans particularly in relation with the current scope of the company's operations and turnover. Hence it will be important to monitor that proceeds are deployed in a cautious manner going forward towards EBITDA enhancing projects in order to consolidate the rating in its category. Furthermore as the transaction structure is not currently anticipating upstream guarantees from operating subsidiaries, the agency estimates that priority debt will represent between 25 and 30 % of the capital structure post bond issue (including a limited amount of secured debt) but notes that Kazatomprom has indicated its willingness to reduce in the short to intermediate term this priority debt. Pressure would develop in case no relative reduction of this structural reduction towards a threshold of 20 % would be witnessed or should debt to EBITDA ratio raise over 2X.

The last rating action on Kazatomprom was implemented on 22 December 2009 when Moody's changed the outlook on the rating to stable from negative.

The principal methodology used in rating Kazatomprom is The Application of Joint Default Analysis to Government Related Issuers, April 2005 (#92432), which can be found at moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Rating Methodologies sub- directory on Moody's website.

The Joint-Stock company Kazatomprom was established in 1997 in accordance with the Decree of the Republic of Kazakhstan. In January 2009 the sate-owned stake of KAP was was contributed into the charter capital of the National Welfare Fund Samruk-Kazyna JSC. At present Samruk-Kazyna is the sole shareholder of KAP.The main activities of the company are the mining of natural uranium, the production of uranium, beryllium, tantalum, niobium and hydrofluoric acid and the generation of electricity, heat power and water. In 2009, the company reported revenue of app. USD 1.215 billion and EBITDA of USD 409 million

57. Moody's confirms KTZ's and Kaztemirtrans' ratings; outlook stable Press release April 27, 2010

Moody's Investors Service has today confirmed JSC National Company Kazakhstan Temir Zholy's ("KTZ") Baa3 issuer rating and the Baa3 rating of the senior unsecured eurobonds, amounting to USD800 million, issued by Kazakhstan Temir Zholy Finance B.V., a special purpose financial company, and guaranteed by KTZ and its operating subsidiaries. Simultaneously, Moody's confirmed JSC Kaztemirtrans' ("KTT") Ba1 corporate family rating (CFR), as KTT is a key whole-owned subsidiary of KTZ and managed as integral part of the KTZ group, with the credit quality of KTT challenged by similar risks. The outlook on the ratings is stable. This rating action concludes Moody's review of the ratings for possible downgrade initiated on 8 February 2010. The review reflected Moody's concerns that the KTZ group's financial and liquidity profile may be potentially pressured by its large investment needs and a material debt maturing over the next 18 months, in particular the group's USD450 million bond due May 2011.

Moody's positively notes recently made decisions on the state funding to cover a part of the KTZ group's investment programme and the confirmed commitment of the government's arm JSC National Welfare Fund Samruk-Kazyna ("Samruk"), the sole shareholder of the group, to support the group, in case of need, in timely repaying its USD450 million bond due May 2011. As a result, the agency's concerns, which drove the review, have been alleviated. Moody's expects that a further material negative pressure on the KTZ group would now be contained, which is reflected in the stable outlook on the ratings.

As decided by the appropriate bodies of the Republic of Kazakhstan, in 2010, the KTZ group is to receive from the government KZT30 billion (USD200 million) equity injection and similar amount of low-interest loans to fund two infrastructural projects. The principal amount and interest payments under the loans will be covered by equity injections from the budget of the Republic in coming years. In addition, a state guarantee in the amount of KZT25 billion (USD167 million) has been approved for the KTZ group to facilitate its access to reasonably-priced commercial funding for the investment projects. Together with earlier introduced tariff increases for 2010, preliminarily approved increases for upcoming years and passenger transportation subsidies, the state-related funding decisions are expected to support the company's ability to manage its financial profile commensurate with its current rating, in particular to cap its adjusted Debt/EBITDA below 2.5x and have EBITA/Interest materially above 3x.

The group's liquidity continues to be supported by its sizable preserved cash (KZT55.4 billion, or about USD360 million, as of the beginning of April 2010), including the cash specifically allocated to address the bond maturity in May 2011 under the company's cash accumulation plan. Moody's believes that, in addition to a cash accumulation plan to address its bond maturity, KTZ has other options to further comfort its refinancing profile, based on its good relationship with foreign bank partners and bond issuance experience. However, given the mentioned sizable bond maturity, until no external refinancing arrangements are signed, the liquidity profile remains dependent on the KTZ group's actual capex versus its large programme, its ability to generate operating cash flow in line with its plan and contain a reduction in the preserved cash over the next 15 months. At the same time, Moody's continues to note the risks associated with the weak local banking system in Kazakhstan, where the group has to place its temporary free cash, though the agency understands that KTZ seeks to maintain the part of its cash reserves allocated for the bond repayment with local subsidiaries of stronger foreign banks.

Having noted the risk of a potential pressure on the company's liquidity, at this stage, Moody's takes additional comfort in the commitment of Samruk, which has been confirmed to the agency, to provide support for KTZ in case of need for KTZ to timely address its bond maturity in May 2011.

A material weakening of the sovereign credit quality and/or a material deterioration in the state support is likely to negatively affect the KTZ group's ratings, including those of KTT. KTZ's ratings could also be downgraded if its cash flow generation ability were to deteriorate, with the adjusted leverage reaching 2.5x and EBITA/Interest weakening to 3x. Any evidence that the group is constrained in its access to funding or any material deterioration of the KTZ group's liquidity position could also exercise downward pressure on the ratings.

Moody's considers KTZ and KTT a Government-Related Issuers (GRIs). As such, KTZ's Baa3 ratings incorporate a two-notch uplift from its Baseline Credit Assessment (BCA) of 12 (equivalent to a Ba2 rating) to reflect the likelihood of state support from the Baa2-rated Government of the Republic of Kazakhstan. KTT's Ba1 CFR incorporates a three-notch uplift from its BCA of 14 (equivalent to a B1 rating).

The last rating action on KTZ and KTT was implemented on 8 February 2010 when Moody's placed their ratings on review for possible downgrade.

The principal methodology used in rating KTZ and KTT is The Application of Joint Default Analysis to Government Related Issuers, April 2005 (#92432), which can be found at moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Rating Methodologies sub- directory on Moody's website.

Headquartered in Astana, Kazakhstan, KTZ is the 100% state-controlled vertically integrated rail group operating the national rail network of the Republic of Kazakhstan. The sole shareholder of KTZ is the state represented by JSC National Welfare Fund SamrukKazyna. KTZ is the monopoly provider of rail infrastructure services and has the leading position in the railway market in Kazakhstan. KTZ's reported 2009 consolidated revenues are KZT 481.0 billion, or USD3.2 billion. Cargo transportation services, including the infrastructure component, account for about 85% of KTZ's total revenues.

KTT is a 100%-owned subsidiary of KTZ. KTT owns and operates the largest railcar fleet in Kazakhstan, generating its revenues largely from leasing railcars out to the KTZ group. The latter provided about 90% of KTT's 2009 revenues of KZT41.6 billion (approximately USD277.5 million).

CE RATINGS 58. Fitch: EMEA Corporate Rating Stabilisation Trend to Continue into Q210 Fitch April 29, 2010

Fitch Ratings says that the tentative signs of EMEA corporate rating stabilisation seen during the second half of last year have noticeably improved since January, with the proportion of companies on Negative Outlooks or Watches falling to 25% at end- Q110 from 35% at the start of the quarter.

Furthermore, whilst the short-term prospects for wholesale rating upgrades remain poor given Fitch's expectation of anaemic economic growth in 2010, the agency does expect the improving rating outlook trend to continue during Q210, bringing the proportion of Negative Outlooks or Watches back towards historical mid-cycle norms of 10-15% by the end of H210.

"2010 has marked a clear change in trend from the predominately negative tone of rating actions last year," said Richard Hunter, Group Managing Director, EMEA and Asia-Pacific Corporates. "However, the outlook is one of delicate stabilisation, as significant downside risks still remain to Fitch's base case corporate rating scenario." Compared to Fitch's predictions in September 2009, the automotive and ad-funded media sectors are likely to see an acceleration of outlook changes to Positive this year due to improved financial results and signs of stabilisation in end-markets. Conversely, the oil refining, mining, steel, airlines and construction sectors are now likely to take longer for such changes to occur given a slower recovery in refining margins, ongoing liquidity challenges for emerging market miners, and a prolonged recovery period for both the construction and airline sectors.

The full report 'EMEA Corporate Portfolio: Spring 2010 Update' is available on Fitch's website, using the link above. In addition, Fitch has released a short video commentary by Richard Hunter, Fitch's Head of EMEA and Asia Pacific Corporates, which discusses key conclusions from the report. Watch the video at http://clearthinking.fitchratings.co.uk/SpringUpdate.html

59. Fitch says EMEA CDO Outlook Negative despite Slower Credit Deterioration Fitch April 28, 2010

Fitch Ratings says that the outlook for European structured credit transactions is still negative despite a slowdown in the pace of corporate credit deterioration. In a new report published today, Fitch says the increased momentum of the global economic recovery, which started in mid-2009, has led to a slowdown in the number of corporate loans moving into delinquency or default. Nevertheless, there remains uncertainty about the viability of some of the companies and the ability of those companies to repay debt at maturity.

In the SME CLO sector for example, the delinquency rate for Spanish SMEs has started to stabilise, but Fitch continues to see a drop in the credit quality of SMEs in Germany and Portugal. The agency has not rated any Greek SME CLOs. "The stabilisation of Spanish SME delinquency rates can be partly attributed to a stabilisation of the economy and partly to a change in servicing practices at the banks," says Jeremy Carter, Managing Director in Fitch's CDO team in London. European leveraged loan CLOs have also benefited during the last quarter, as the pace of defaults has slowed and junior over-collateralization tests are starting to come back into compliance in some transactions. Laurent Chane-Kon, Director in Fitch's CDO team London, says "The absence of large-scale refinancing opportunities for European leveraged loans continues to impose a negative outlook on the sector. However, the European leveraged loan sector has started to show early signs of stabilisation for high-quality credits."

The full report, entitled "European Structured Finance Structured Credit Outlook - April 2010", highlights the key performance trends affecting major Structured Credit asset classes throughout EMEA and is available www.fitchratings.com. It includes detailed country-by-country asset class outlooks in a table format and more in-depth analysis on the rationales for the respective outlooks.

Further information on Fitch's EMEA structured finance offering can be found in "EMEA Structured Finance Snapshot", which is available at www.fitchratings.com. The Snapshot consolidates and highlights the key research and commentary produced by the agency's EMEA structured finance group and includes previously unpublished Fitch data and multimedia content that will be updated each quarter.

60. Moody's Takes Negative Rating Actions on Greek Structured Finance Transactions bne April 29, 2010

Moody's Investors Service said it has taken negative rating actions on 30 structured finance transactions backed by Greek assets, SeeNews reported.

"The rating actions were prompted by Moody's downgrade on 22 April of the Greek government's sovereign debt rating to A3 from A2 and its placement on review for further possible downgrade," Moody's said late on Tuesday. The rating actions affect 6.9 billion euro of tranches from 11 RMBS deals, 19.8 billion euro of tranches from 16 ABS deals and 3.0 billion euro from three CLOs, it added.

Moody's further noted that some of the affected structured finance transactions rely on the performance of the National Bank of Greece, EFG Eurobank Ergasias SA, Alpha Bank AE and Piraeus Bank, or their subsidiaries, as servicers, swap counterparties and/or collection account banks, among other roles.

Some of these banks have operations in Southeast Europe.

Moody's also said that in its normal monitoring of these structured finance ratings, it will closely follow the steps taken by the banks within each transaction to remedy the impact of the recent Greek bank rating actions.

61. Republic of Hungary Ratings Currently Unaffected By Election Result, But Creditworthiness Could Benefit Over Time Press Release April 26, 2010

FRANKFURT (Standard & Poor's) April 26, 2010--Standard & Poor's Ratings Services said today the outcome of general elections in Hungary has no immediate impact on the ratings on the Republic of Hungary (BBB-/Stable/A-3). The two-thirds majority of parliamentary seats gained by center-right opposition party Fidesz should enable the new government to implement far-reaching administrative and fiscal reforms that require a constitutional change. Should the government choose to implement such potentially unpopular reforms, such as reforming the municipality system and reducing the overprovisioning of public services, we believe this would eventually contribute to strengthening Hungary's public finances, and could support rating improvements over the medium term. Ultimately, however, we believe improvements in Hungary's creditworthiness will depend on the government's overall policy agenda and policy implementation, including the perspective for the evolution of government deficits and debt levels. We expect the government to present these in more detail over the coming weeks and months.

62. S&P has raised CME's rating to 'B' from 'B-' bne April 27, 2010

S&P has raised CME's (CETV US/CETV CP) l-t term rating to 'B' from 'B-', citing material improvement in liquidity and its business risk profile. A 'less aggressive' acquisition policy was another cause.

SE RATINGS 63. Bulgarian City of Stara Zagora Downgraded To 'BB' On Deteriorated Liquidity Position; Outlook Negative Press release April 27, 2010

The Bulgarian City of Stara Zagora is exposed to significant liquidity risks because of its weakened cash position and higher debt service in the context of slower revenue growth during Bulgaria's continuing economic contraction. We are lowering our rating on Stara Zagora to 'BB' from 'BB+'. The negative outlook reflects our expectation that the continuing economic contraction this year, and only tepid growth beginning in 2011, will keep liquidity risks high.

MOSCOW (Standard & Poor's) April 27, 2010--Standard & Poor's Ratings Services said today that it had lowered its long-term issuer credit rating on the Bulgarian City of Stara Zagora to 'BB' from 'BB+'. The outlook is negative.

"The downgrade reflects the recent deterioration of Stara Zagora's liquidity position amidst higher debt repayments within a framework of continuing economic contraction and only halfhearted fiscal adjustment, in our view," said Standard & Poor's credit analyst Jean-Louis Renaud.

The rating remains constrained by high liquidity risks stemming from low available free cash relative to higher-than-usual debt payments scheduled over the next 12 months. Moreover, the city's consistently weak budgetary performances and in our view reluctance to fully utilize its available revenue flexibility--all within an environment of dampened revenue growth from the current economic contraction-- exacerbate the high liquidity risks.

However, the city has a relatively modest debt burden.

"The negative outlook reflects our view that liquidity risks will remain high because of Stara Zagora's continuing low cash balances, weak budgetary performances, and continuing expenditure pressures," said Mr. Renaud.

We would consider revising the outlook to stable if: the city were to more fully harness its revenue flexibility to ease liquidity pressures; economic recovery were stronger than we expect; or the city were to significantly increase its operating surplus while containing debt growth and rebuilding a comfortable level of cash reserves.

We might lower the rating if: the economic contraction continues beyond 2010 or amplifies, with a concomitant impact on Stara Zagora's revenue growth and operating balances; the anticipated EU/central-government funding was not available; anticipated asset sales were not forthcoming; bank lending was denied; or the city did not lower its planned capital expenditures, prompting it to increase its debt significantly beyond forecasts.

Although unlikely, we could raise the rating if the city is able to significantly increase its operating surplus while containing debt growth and rebuilding a comfortable level of cash reserves.

64. Bulgarian City of Varna Downgraded To 'BB' On Increased Debt And Pronounced Drop In Liquidity; Outlook Stable Press Release April 29, 2010

The Bulgarian City of Varna's risk profile has deteriorated as a result of a notable increase in debt and pronounced drop in liquidity. This has occurred within a context of continuing high capital expenditures and lower revenue growth from Bulgaria's continuing economic contraction. We are lowering our rating on Varna to 'BB'. The stable outlook reflects our expectation that, in conjunction with next year's expected economic upturn, budgetary performance will stabilize because of growing operating balances, buttressed by continued access to borrowing and sustainable debt service.

MOSCOW (Standard & Poor's) April 29, 2010--Standard & Poor's Ratings Services said today that it had lowered its issuer credit rating on the Bulgarian City of Varna to 'BB' from 'BB+'. The outlook is stable.

"The downgrade reflects the deterioration in Varna's risk profile as a result of a notable increase in debt and a pronounced drop in liquidity," said Standard & Poor's credit analyst Jean-Louis Renaud.

This has occurred within a context of continuing high capital expenditures and lower revenue growth due to Bulgaria's continuing economic contraction.

The rating is constrained by Varna's tight liquidity, rapid growth in debt, and limited revenue predictability amidst an environment of high infrastructure investments and continuing economic contraction.

These factors are mitigated by Varna's diversified and wealthy economy relative to the national average, and improved operating performance thanks to strong expenditure control.

The stable outlook reflects our view that Varna's budgetary performances will stabilize at the currently sustainable levels, notably amidst higher operating surpluses, continued access to borrowing, and no accumulation of debt beyond forecast levels. We forecast the city's liquidity will remain tight, but sustainable.

"We might lower the rating if Bulgaria's economic contraction continues beyond 2010 or amplifies, with a concomitant impact on Varna's revenue growth and operating balances," said Mr. Renaud.

Moreover, the city could face negative rating pressures if: the anticipated EU/central government funding is not available for investment projects already started; anticipated asset sales are not forthcoming; or planned capital expenditures are not adjusted downward, thus prompting the city to increase its debt significantly beyond forecasts.

Although unlikely, we might raise the rating if the city were to gain more substantial financial support from the state budget or EU funds; enhance revenue performance beyond forecasts, leading to better-that-expected budgetary performance and lower debt accumulation; or improve its currently weak liquidity position.

65. Greece Long- And Short-Term Ratings Lowered To 'BB+/B'; Outlook Negative; '4' Recovery Rating Assigned To Sovereign Debt Press Release April 27, 2010

We have updated our assessment of the political, economic, and budgetary challenges that the Greek government faces in its efforts to place Greece's public debt burden onto a sustained downward trajectory. We are lowering our ratings on Greece to 'BB+/B' from 'BBB+/A-2' and assigning a negative outlook. The negative outlook reflects the possibility of a further downgrade if the Greek government's ability to implement its fiscal and structural reform program materially weakens in our view, undermined by domestic political opposition at home or by even weaker economic conditions than we currently assume.

MADRID (Standard & Poor's) April 27, 2010--Standard & Poor's Ratings Services said today that it has lowered its long- and short-term sovereign credit ratings on the Hellenic Republic (Greece) to 'BB+' and 'B', respectively, from 'BBB+' and 'A-2'. The outlook is negative. At the same time, we assigned a recovery rating of '4' to Greece's debt issues, indicating our expectation of "average" (30%-50%) recovery for debtholders in the event of a debt restructuring or payment default. The 'AAA' transfer and convertibility assessment is unchanged.

"The downgrade results from our updated assessment of the political, economic, and budgetary challenges that the Greek government faces in its efforts to put the public debt burden onto a sustained downward trajectory," said Standard & Poor's credit analyst Marko Mrsnik.

We believe that the government's policy options are narrowing because of Greece's weakening economic growth prospects, at a time when pressures for stronger fiscal adjustment measures are rising. Moreover, in our view, medium-term financing risks related to the government's high debt burden are growing, despite the government's already sizable fiscal consolidation plans. Our updated assumptions about Greece's economic and fiscal prospects lead us to conclude that the sovereign's creditworthiness is no longer compatible with an investment-grade rating.

As a result of Greece's rising commercial borrowing costs, the authorities have requested extraordinary support from the Eurozone and the International Monetary Fund (IMF). We anticipate further information in the coming weeks from EU members regarding the terms and duration of support for Greece. We believe that a multiyear European Economic & Monetary Union (EMU)/IMF support program is likely, which should, in our opinion, significantly ease Greece's near-term liquidity challenges. Nevertheless, in our view, pressures for more aggressive and wide- ranging fiscal retrenchment are growing, in part because of recent increases in market interest rates. In our revised projections, we forecast Greece's net general government debt-to-GDP ratio reaching 124% of GDP in 2010 and 131% of GDP in 2011.

We continue to believe that the size and scope of the Greek government's fiscal consolidation program, and the government's political will to implement it, are the main drivers of our sovereign ratings on Greece. Sustained success in this regard could, in time, be reflected in lower market interest rates on Greece's debt. Early indications show that the government is likely to meet its 2010 deficit target. The authorities are also moving ahead with their structural reform agenda, adopting tax reform in April, while proposals on pension reform are expected in May.

Nevertheless, we believe that the dynamics of this confidence crisis have raised uncertainties about both the government's administrative capacity to implement reforms quickly and its political resolve to embrace a fiscal austerity program of many years' duration. Based on our updated assessment, we estimate that the adjustment needed in Greece's primary fiscal balance relative to that of 2008 in order to stabilize the government debt burden amounts to at least 13% of GDP--a very high level compared with that which other sovereigns have been able to achieve. The government's resolve is likely, in our opinion, to be tested repeatedly by trade unions and other powerful domestic constituencies that will be adversely affected by the government's policies. At the same time, we expect official lender support to be highly conditional and revocable, and as such, we do not believe that it provides a floor under Greece's sovereign ratings.

As previously noted, the government's multiyear fiscal consolidation program is likely to be tightened further under the new EMU/IMF agreement. This, in our view, is likely to further depress Greece's medium-term economic growth prospects. Under our revised assumptions (see below), we expect real GDP to be nearly flat over 2009-2016, while the level of nominal GDP may not regain the 2008 level until 2017. Moreover, we find that Greece's fiscal challenges are increasing pressures on the banking and corporate sectors. In particular, we see continuing fiscal risks from contingent liabilities in the banking sector, which could in our view total at least 5%- 6% of GDP in 2010-2011.

Greek Government Economic Scenarios And Standard & Poor's Updated Baseline Scenario

Average 2010-2013 Greek SGP 1 Greek SGP 2 S&P baseline

Real GDP growth (% yoy) 1.4 0.9 (0.8)

Nominal GDP growth (% yoy) 3.4 2.7 0.0

General gov't. deficit (% GDP) 4.8 4.8 5.8

CA deficit (% GDP), 2013 6.0 6.4 0.0

Gov't. debt/GDP (%), 2013 113 113 137

SGP--Stability and Growth Program (January 2010). Greek SGP 1--Greek government's base case. Greek SGP 2--Greek government's alternate scenario. yoy-- Year on year. CA--Current account.

Together with the lowering of our ratings on Greece to 'BB+/B', we have also assigned a recovery rating of '4' to Greece's debt. This is in keeping with our policy to provide our estimates of likely recovery of principle in the event of debt restructuring or a debt default for issuers with a speculative-grade rating. A recovery rating of '4' reflects our current expectation of "average" (30%-50%) recovery for holders of Greek government debt.

"A further downgrade is possible if, in our view, the Greek government's ability to implement its fiscal and structural reform program is undermined by domestic political opposition or materially weakens for other reasons, including even weaker economic conditions than we currently assume," said Mr. Mrsnik.

We could revise the outlook to stable if we perceive that political support for government economic policies remains robust and Greece's economic growth prospects prove to be more benign than we currently anticipate.

66. Greek Bank Ratings Lowered Following Sovereign Downgrade; Outlook Negative Press Release April 27, 2010

STOCKHOLM (Standard & Poor's) April 27, 2010--Standard & Poor's Ratings Services said today that it had lowered its ratings on four Greek banks following a three-notch downgrade of the Greek sovereign (Hellenic Republic; BB+/Negative/B) (See "Greece Long- And Short-Term Ratings Lowered To 'BB+/B'; Outlook Negative; '4' Recovery Rating Assigned To Sovereign Debt", published April 27, 2010 on Ratings Direct).

We have lowered our long-term counterparty credit ratings on EFG Eurobank Ergasias S.A., Alpha Bank A.E. and Piraeus Bank S.A. to 'BB' from 'BBB' and our short-term counterparty credit ratings to 'B' from 'A-2'.

We have lowered our long-term counterparty credit rating on National Bank of Greece S.A. (NBG) to 'BB+' from 'BBB+' and our short-term counterparty credit rating to 'B' from 'A-2'.

The outlook on all the above long-term ratings is negative, reflecting the possibility that they could be lowered if the sovereign is downgraded further or if liquidity, asset quality or profitability at the banks worsen more than currently anticipated.

We have lowered our long-term counterparty credit rating on NBG's strategically important Bulgarian subsidiary, United Bulgarian Bank A.D. (UBB), to 'BB' from 'BBB- ' and the short-term counterparty credit rating to 'B' from 'A-3'. This rating action reflects our view that the degree of expected support from NBG has fallen as a result of pressure in NBG's domestic market. Accordingly, the long-term rating on UBB now factors in an uplift of one notch compared with three previously. The outlook is negative.

The rating actions on the Greek banks follow our downgrade of the Greek sovereign. The sovereign downgrade results from Standard & Poor's updated assessment of the political, economic, and budgetary challenges that the Greek government faces in its efforts to put the public debt burden onto a sustained downward trajectory. We believe that the government's policy options are narrowing because of Greece's weakening economic growth prospects, at a time when pressures for stronger fiscal adjustment measures are rising. As a result of Greece's rising commercial borrowing costs, the authorities have requested extraordinary support from the Eurozone and the International Monetary Fund. We anticipate further information in the coming weeks from EU members regarding the terms and duration of support for Greece.

The counterparty rating on a financial institution reflects the sovereign risk posed by its country of domicile. It is unlikely that a bank could be viewed as more creditworthy than the sovereign itself in terms of meeting foreign- or local-currency obligations due to the government's legal and regulatory powers over the financial markets and the banks themselves. The rating actions also take into account our view that these institutions are exposed, albeit to varying degrees, to the current turmoil in the capital markets. We believe that NBG's creditworthiness benefits from what we continue to view as a comparatively stronger retail franchise and from lower reliance on wholesale funding which makes it slightly less vulnerable than its domestic peers to short-term pressure from capital market disruptions.

While we understand all Greek banks rated by Standard & Poor's have relatively high customer deposit bases that range from 65% to 75% of their respective total funding needs, we observed some moderate deposit withdrawals in the first three months of 2010 as a result of what appears to us to be deteriorating confidence in the Greek economy.

Although Greek banks currently maintain cushions in the form of liquid assets and have access to a European Central Bank (ECB) facility, we believe that imbalances in their respective funding profiles are likely to remain throughout 2010 if access to wholesale funding remains closed to all of them and the liquidity cushions and unencumbered assets required under the ECB facility are gradually used up.

Moreover, Greek banks are, in our opinion, directly exposed to the sovereign's deteriorating credit quality through their large portfolios of Greek government debt. We will continue to assess how the latent market risk embedded in these portfolios could materialize and affects the banks' respective financial profiles.

In addition, the deteriorating economic conditions that we expect through 2010 are likely to lead to tougher operating conditions than those that we had previously incorporated into our ratings on Greek banks. All Greek banks reported meaningful growth of nonperforming loans in 2009, at levels that in some riskier segments were significantly above those reported in 2008. We expect Greek banks' asset quality to remain under pressure in 2010 as the country's economy is expected to undergo an even deeper recession than in 2009.

We believe that profitability will decline further in the next few quarters, mainly due to mounting pressure on banks' margins and increasing impairment charges. Fierce competition among domestic competitors to attract retail deposits is likely to significantly increase the cost of funding and to strain banks' revenue generation. In addition, the profitability of all of the banks is likely to be impacted over the medium term by the eventual unwinding of their funding imbalances and, specifically, their heavy reliance on low-cost ECB funding. In our view, this, combined with declining business volumes and lower contributions from trading income, is likely to substantially reduce banks' loss absorption capacity.

UKRAINE CREDIT 67. Budget draft for 2010 in line with IMF conditions Dragon Capital, Kyiv April 28, 2010

Parliament is due today to debate the government's state budget bill for 2010 targeting revenues of UAH 267bn (+19% y-o-y) and a deficit of UAH 58bn (5.3% of GDP). (Verkhovna Rada) The government plans to finance the deficit using external borrowings mostly, expecting a $2.0bn budget support loan from the IMF, a $1.3bn Eurobond placement, a $0.5bn World Bank loan and $0.5bn of project financing loans. Factoring in $0.8bn of scheduled external debt redemptions, planned net foreign borrowings amount to $3.5bn (UAH 28bn; 2.5% of GDP), thereby covering almost half of the projected deficit. Domestic borrowings are seen at UAH 66bn ($8.3bn), including UAH 30bn of bank recapitalization bonds. Accounting for scheduled domestic debt redemptions of UAH 17bn, net domestic borrowings (excluding recapitalization-related issuance) should reach UAH 19bn (1.7% of GDP). The remaining budget deficit is to be financed by UAH 10bn (0.9% of GDP) of privatization receipts.

On the revenue side, the government envisages a 36% y-o-y (UAH 55bn) increase in tax revenues, to UAH 203bn, pinning its hopes on economic recovery, higher excise duties on alcohol and tobacco, higher resource taxes and better administration of tax collection. Planned budget expenditures incorporate the hikes in the minimum wage and minimum pension that were approved last fall and eventually led the IMF to suspend its lending program. Yet, to mitigate the impact of the sharp minimum wage increase on budget spending, the government came up with a mechanism to limit the pace of growth in public sector wages. In addition, the government plans to increase transfers to the Pension Fund (PF) by 40% y-o-y (UAH 19bn) to UAH 68bn to enable it to finance higher pensions, considering this volume sufficient to balance the PF this year after it ran a 1.5% of GDP deficit in 2009.

The IMF reportedly requires that Ukraine trim the general government deficit to 6% of GDP this year from 9.0% of GDP in 2009, inclusive of a 1% of GDP Naftogaz Ukrainy gap. Deputy PM Serhiy Tigipko said in a newspaper interview published yesterday the Fund would not be opposed to the planned increase in social payments s long as the government managed to keep the budget deficit within the agreed limits, economizing elsewhere. Having negotiated lower gas prices with Russia last week, the government looks fully capable of limiting the Naftogaz deficit to 1% of GDP (vs. 2.5% last year).

Thus, provided the Pension Fund remains balanced as is being planned, the published budget draft looks generally in line with IMF requirements and should pose no obstacles to the resumption of IMF financing. At the same time, the risk exists that the government has overestimated budget revenues and underestimated the burden of the higher social payments. We therefore expect fiscal issues to remain high on the agenda during the next round of negotiations with the IMF (i.e. regarding the next tranche under the bailout program), probably leading to a loosening of the budget deficit ceiling, as was the case before, to an estimated 7.0-7.5% of GDP. For more details please see our note issued yesterday.

Olena Bilan

68. Sovereign Eurobond in the pipeline for June BG Capital April 26, 2010

Deputy Finance Minister Andriy Kravets on Friday said Ukraine is preparing to tap Eurobond markets with a new sovereign debt issue after the adoption of the state budget for 2010, potentially in June. Karevts alluded to a 10-year issue with an interest rate at below 8% p.a.

69. The next step after the budget is the resumption of the IMF loan ING 28 April 2010

programme Parliament adopted the budget stipulating a deficit of 5.2% of GDP ñ the full version presented by the government recently. The markets will wait for the IMFís response.

Yesterday, parliament adopted the 2010 budget with the parameters presented earlier by the government (see our Ukraine: Financial Markets Snapshot of 27 April). In particular, the new budget stipulates growth in revenues by 18.7% vs actual revenues in 2009, while expenditures are to increase by 33.5%. The government hopes to take in higher revenues on the back of an additional rise in excise taxes for alcoholic and tobacco products, higher resource taxes as well as better tax administration. Higher expenditures are backed by the minimum wage hike as well as growth in transfers of state funds to the pension fund. The budget deficit should reach 5.2% of GDP, thus not exceeding the deficit targeted by the IMF (6% of GDP including the Naftogaz deficit). Among budget expenditures, the financing of the minimum wage increase could be a major stumbling block during negotiations with the IMF as the adoption of this law was the main reason the IMF postponed the loan program in late 2009. From the other side, as the budget deficit, even with the additional expenditures for the minimum wage increase, does not exceed the IMFís requirement, we believe it is quite possible the IMF will accept the current version of the budget.

According to First Deputy Head of the Presidential Administration Iryna Akimova, the major macroeconomic parameters of the new budget were agreed with the IMF. Additionally, Vice PM Tihipko said recently in a local newspaper that the IMF would not oppose the decision to include additional social spending in the budget if the deficit does not exceed the level targeted by the IMF. Thus Ukrainian risk dynamics in the short term rest on the response of the IMF and its reaction on the adopted budget, as the resumption of the IMF loan to Ukraine would be a significant catalyst for another rise in Ukrainian Eurobond prices. We believe we will not have to wait too long for this response as the IMF may send a mission back to Ukraine already in the first half of May to agree a new memorandum.

Investment implications: The budgetís adoption will maintain the environment of economic stability that has become more evident since the elections. Furthermore, the new budget deficit not exceeding IMF requirements should raise the probability the IMF programme will be resumed quite soon. At the same time, Ukrainian Eurobonds should be rather flat on the news while news from the IMF would have a more significant impact on price dynamics.

70. Ukraine adopts 2010 budget More realistic, but still very ambitious Renaissance Capital, Russia Wednesday, April 28, 2010

Ukraine has adopted a 2010 budget. The 2010 budget law adopted today differs from that submitted by the previous government in Sep 2009 mainly in the macroeconomic forecast, which now seems more realistic to us. Nominal GDP is expected to be UAH1,083bn vs UAH1,178bn in the previous draft, and inflation is expected to be 13.1% vs 9.7% before. As a result, the expected revenues in the general budget total UAH267.5bn vs UAH285bn in the previous version, while planned expenditures are unchanged at UAH323.6bn. The total budget deficit is expected to be UAH57.8bn, or 5.3% of GDP, according to the government's forecast, which is in line with IMF requirements.

_ Planned budget revenues still rather ambitious. Although the new government has lower expectations of 2010 revenues, they are still rather ambitious compared with revenues in 2009 and in Jan-Feb 2010 (see Figure 1). Giving expected real GDP growth of 3.7% and inflation of 13.1%, a 36% increase in tax revenues in 2010 could be achieved only though much better administration of tax collection, in our view. A bill that proposes tightening the rules of tax administration was submitted to parliament yesterday (26 Apr). If the bill becomes law, the government expects to increase revenues from corporate income tax and VAT by about UAH11bn. Nevertheless, the previous government did its utmost to collect taxes ahead of schedule and effectively froze export VAT rebates, so we think increasing revenues from corporate income taxes and from VAT could prove very challenging. Giving the performance of VAT in 2009, we see a high risk of actual revenues again being lower than expected, leading to a higher deficit. The government also plans to raise excise duties on alcohol, tobacco and petrol in order to achieve 44% growth in revenues from excise taxes. In addition, the budget includes significant non-tax revenues from the transfer of UAH10bn in profits from the National Bank of Ukraine (NBU), and from UAH9.8bn of rent.

_ Expenditures: Growth in social spending and increase in support for the Pension Fund (PF). In 2010 planned budget expenditures are 33.5% (more than UAH80bn) higher than in 2009. The government envisages spending UAH21.8bn on an increase in the minimum wage adopted in Nov 2009, which was not welcomed by the IMF at the time. However, according to Deputy Prime Minister Sergiy Tygypko, who has just returned from the annual spring meetings of the IMF and the World Bank, the IMF will not oppose an increase in social spending if the government manages to keep the budget deficit within the agreed limits. Moreover, the 2010 budget law contains a ban on any further increase in salaries in the public sector without changes in the budget law. The PF deficit exceeded UAH16bn in 2009 and was funded through loans from the state treasury account. The new budget draft foresees a PF deficit of UAH29.5bn, which seems realistic to us. The state plans to transfer $67.8bn from the budget to the PF (including subsidies for some kinds of pensions), over 50% more than was transferred in 2009. According to Minister of Finance Fedir Yaroshenko, in 1Q10 the PF received about UAH12bn from the budget and about UAH5bn in loans from the state treasury account.

_ Total financial needs and sources of funding: In addition to the planned deficit of the general budget, the government's financial needs in 2010 include UAH23.8bn of state debt falling due to 2010 and about UAH30bn for bank recapitalisation, and the state will require a total of more than UAH110bn of new funding. According the draft budget, the Ministry of Finance (MinFin) plans to attract about UAH100bn of new borrowings; the remainder (UAH10bn) should be covered with the proceeds from privatisation (Figure 2). MinFin plans to borrow $4.3bn (UAH34.1bn) abroad, including a $2.0bn loan from the IMF, $1.3bn through new eurobond placements, a $0.5bn World Bank loan and $0.5bn of project financing loans. Over UAH66bn are planned to be attracted internally.

This number includes UAH30bn of banks' recapitalisation issues, which previously were not placed on the market, but were instead purchased by the NBU; therefore, the total amount of the new "market" supply of local government bonds (OVDP) in 2010 is expected to be UAH36bn. Since the beginning of the year, MinFin has sold about UAH16bn of OVDP. As we understand, the remainder (about UAH20bn) will be placed in special OVDP issues to cover the state's VAT rebate obligations. This seems to be in line with Tygypko's statement that MinFin may further limit the supply of the new OVDP in the market to the special VAT-OVDP this year, and will place ordinary OVDP only in case of additional need. Given that MinFin is going to place VAT-OVDP gradually in several portions, while the supply of ordinary OVDP in the primary market will be limited, we think growth of OVDP yields may be avoided.

_ In line with the IMF's requirements. A budget deficit (including the PF deficit) of 5.3% of GDP seems to be in line with IMF requirements, as is the budget's cancellation of the tax on currency exchanges. The new government seems to be ready to fulfil all the IMF's requirements in order to agree on a new standby programme. We believe Ukraine now has a high chance of receiving a new loan from the IMF, even though the government's expectations for revenues seem ambitious to us.

_ Where does Naftogaz fit in? The government has yet to disclose Naftogaz's expected deficit (adjusted for lower gas prices) and the sources that will be used to cover it. Although Prime Minister Mykola Azarov previously announced Naftogaz will have to deal with its issues itself, we think ensuring Naftogaz has sufficient hryvnia funds to buy foreign currency from the NBU for monthly payments to Gazprom is a vital task for the government. We note the draft budget does not include any substantial support for Naftogaz, apart from some tax waivers. However, MinFin is planning to use only $2bn from the IMF to cover its budget needs, while previously Azarov said Ukraine might need about $7bn from the IMF this year. This leads us to believe the government plans to use the rest of the funds it is likely to receive from the IMF this year to cover Naftogaz's deficit.

71. Current account runs $0.2bn deficit in March Dragon Capital April 26, 2010

Ukraineís current account (C/A) gap widened to $239m in March from a (revised) $57m deficit in February.

The deterioration was driven by the merchandise trade deficit, which doubled m-o-m to $0.7bn, as the service trade surplus stood virtually unchanged at $220m. Goods exports rose 16% m-o-m last month (+24% y-o-y) to $4.0bn on account of steel, machinery and chemicals. Imports grew 25% m-o-m (+25% y-o-y) to $4.7bn, led by stronger imports of fuels, raw materials (partly due to stronger demand from export-oriented industries) and machinery. In particular, machinery imports surged 19% m-o-m and 38% y-o-y in March, indicating a revival in domestic investment demand.

Should investment demand keep growing, it will be conducive to deterioration in the C/A balance, offsetting the positive effect of lower gas prices (last weekís Ukrainian- Russian gas agreement implies the gas price for Ukraine will fall to an estimated $263/tcm from $328/tcm on average this year). However, we see upside risk to our current C/A deficit forecasts of 0.4% of GDP in 2010 and 1.1% of GDP in 2011 and will revise them soon.

Olena Bilan

72. Deputy PM comments on prospective program with IMF Dragon Capital April 26, 2010

Deputy Prime Minister Serhiy Tigipko said Ukraine expects its new 2.5-year program with the IMF to amount to $20bn, with about half of the total lending volume to be earmarked for budget support.

Ukrainian authorities previously spoke about a $12bn lending program. Tigipko, who was in Washington over the weekend to participate in the annual Spring Meetings of the IMF and the World Bank, stressed that the lending amount he named is tentative and subject to further negotiations with the Fund. The IMF reportedly welcomed Ukraineís new gas agreement with Russia, which we believe makes the government capable of trimming its general deficit to 6% of GDP this year (vs. 9% in 2009), inclusive of Naftogaz Ukrainyís 1% of GDP deficit. Yet, Ukraineís new agreement with the IMF depends on the contents of the 2010 budget draft, which was approved by the government on Friday and is expected to be released these days.

Olena Bilan

73. Dnipropetrovsk's rush retailer to float bonds worth UAH4mn bne April 27, 2010

Dnipropetrovsk-based RUSH Ltd., which owns the EVA perfume and cosmetics stores, plans to float C Series bonds worth UAH40mn, reports Interfax.

Citing the company report, the news agency says that the decision to openly float bonds was made by the company's participants at a meeting held on April 21, 2010.

In the meantime, DTEK, the largest private energy holding of Ukraine, has floated five-year eurobonds worth $500mn with a fixed coupon rate of 9.5% per annum, reports Interfax.

The news agency quoted the head of the trading department at Phoenix Capital, Ivan Khomenko, as saying that at 1530 London time on April 21 the bid book closed for the issue [of eurobonds], the bids were worth 1.5 times more than planned, but all investors who wanted to buy eurobonds were able to receive them.

74. Ferrexpo may issue debut Eurobonds in 2010 Dragon Capital April 29, 2010

LSE-listed Ferrexpo, Ukraineís second-largest pellet producer, may tap the Eurobond market with a debut issue later this year.

The company faces no large debt redemptions in 2010 but plans to invest $170- 200m to develop its iron ore deposits, which probably explains its Eurobond issuance plans. Last November, Ferrexpo attracted a $230m club loan paying Libor+7%. Its end-2009 net debt stood at $258m, with a Net Debt/EBITDA of 1.86x.

Olga Slyvynska

75. Financial account posts $1.3bn surplus in March Dragon Capital April 26, 2010

Ukraineís financial account (F/A) posted a $1.3bn surplus in March, reversing from Februaryís $0.6bn gap and bringing its 1Q10 balance to -$0.6bn.

The most notable development seen last month was a reversal of resident-based flight to foreign cash on the back of gradual hryvnia appreciation, which resulted in $0.3bn of foreign cash inflows to the banking system for the first time since May 2009. Net debt capital flows also became positive last month, totaling $0.4bn, on account of government borrowings (purchases of domestic UAH-denominated government bonds by non-residents) as well as increased private sector debt inflows. Banks attracted $86bn of debt on a net basis last month, mostly rolling over redemptions of long-term liabilities using new short-term borrowings, bringing the sectorís debt rollover rate to 103% from 92% in February. Corporate sector debt rose by $0.2bn last month, implying a roll-over rate of 134% (vs. 58% in February). Finally, FDI inflows grew to $0.5bn in March (from $0.3bn in February) on account of the banking sector, bringing 1Q10 FDI to $1.0bn (+11% y-o-y).

Positive F/A developments recorded in March have apparently continued in April, keeping a surplus of foreign currency on the F/X market. Given the short-term nature of capital inflows in the country, its F/A balance will remain volatile this year and sensitive to news flow. But with the IMF program expected to be back on track in May-June, we forecast the F/A balance to remain in positive territory for most of the year, leading to a full-year surplus of $1.0bn (0.7% of GDP) following a deficit of 10% of GDP recorded last year.

Olena Bilan

76. Fitch assigns ëB-í ratings to upcoming Privatbankís Eurobond issue ING 28 April 2010

On 26 April, Fitch ratings agency assigned an expected long-term rating of ëB-ë to Privatbankís upcoming Eurobond issue, in par with current ratings of two banksí outstanding Eurobonds. The agency stated that the new Eurobond issue is expected to have a maturity of five years. According to the agency, the major credit risk for Privatbank may come from its high share of retail deposits in its total portfolio (50%).

Interfax reported yesterday that Privatbank may partially exchange its shortest outstanding Eurobond (worth US$500m, due in 2012) for the new longer issue. We believe a success of similar exchange with other corporate Ukrainian Eurobonds recently induced Privatbank to think about the offer to investors. Thus taking into consideration the success of recent exchange offers on other corporate Eurobonds and the rather strong credit profile of Privatbank we believe investors will agree to the exchange offer as it could provide additional premium for increasing the duration of their investment.

Privatbankís Eurobond issues are currently yielding at 9.2-10.5%. Thus we expect the yield on the new Eurobond issue to stay within the range of 9.75-10.50%. At the same time, we maintain our estimates of low probability of the bankís default backed by its leading position in the banking sector, strong shareholdersí support and positive public credit history. Thus we maintain our expectations of Privatbankís spread tightening (by 75-100bp) close to the yield level of Ukreximbank (EXIMUK) in the medium-term period.

77. Gov't proposes higher excise taxes on alcohol and gasoline Dragon Capital, Kyiv April 28, 2010

Concurrently with submitting the 2010 budget draft to parliament, the government asked lawmakers to hike a range of excise taxes intended to boost budget revenues by UAH 4.1bn. Those include taxes on beer (+23% to UAH 0.74 ($0.09)/liter) and gasoline (+56-82% to EUR 172-180/tonne). (Government) Last year, excise taxes on beer were raised by 94% to UAH 0.6/l. If the new tax level is approved, it will negatively affect domestic beer producers, including Slavutych [Buy; FV $0.7] and SUN InBev Ukraine [Not Rated], though we expect the brewers to be able to pass on at least part of the tax hike to end consumers. The proposed gasoline tax increase implies Galnaftogaz [Buy; FV $0.026] will have to raise excise tax payments by about $50m annually.

However, we expect the company, as well as other fuel traders, to fully pass on higher costs to consumers as retail demand for fuel is quite inelastic.

Andriy Bespyatov

78. IFC approves up to $75m in loans for Mriya Agro Holding Dragon Capital April 29, 2010

The IFC has approved up to $75m in loans for Mriya Agro Holding, including long- term quasi-equity financing and a three-year renewable working capital facility.

Mriya plans to use the financing, which consists of a one-year loan for working capital replenishment of up to $25m, a long-term convertible loan of up to $25m, and warrants of up to $25m, to finance storage capacity expansion, agricultural machinery purchases and land lease (see our Daily from Feb. 24 for more details). The announced investments were planned beforehand, and we included them in our projections for Mriya.

Tamara Levchenko,

79. IMF delegation may visit Ukraine in May to discuss loan program Ria Novosti April 28, 2010 delegation from the International Monetary Fund may visit Ukraine within the first two weeks of May to discuss a new loan program for the former Soviet state, Ukrainian Vice-Premier Sergei Tigipko said on Tuesday.

Tigipko is currently in Washington discussing the provisions of a multi-billion loan for Ukraine with IMF officials.

"The next stage of consultations concerning further cooperation between the IMF and Ukraine may begin in the first half of May, when the IMF mission arrives in Kiev," Tigipko's press service quoted him as saying.

Tigipko earlier said that Ukraine might receive $19-20 billion as a loan from the IMF under a new partnership program designed for a period 36 months. Initially the country was planning to request $12 billion from the international financial body.

Ukrainian authorities earlier said they expected to obtain the first loan tranche already in June 2010.

Ukraine's current stand-by program, which began in 2008, amounts to $16.4 billion, with $11 billion already provided in three tranches. The fourth tranche of $3.8 billion was due in late 2009 but has not yet been disbursed because of the recent political instability and the country's failure to adopt its budget.

Ukraine on Tuesday adopted its federal budget for 2010.

On Sunday, Russian Finance Minister Alexei Kudrin said Russia would back the new loan program for Ukraine.

The IMF mission was in Ukraine on March 24 - April 2, 2010 to hold talks with the Ukrainian authorities on the resumption of cooperation.

KIEV, April 27 (RIA Novosti)

80. IMF notes progress in loan talks with Ukraine

The IMF released a statement quoting its First Deputy Managing Director John Lipsky as saying his discussions with the Ukrainian delegation in Washington last weekend revealed progress in many areas but left a number of outstanding issues related to ìfiscal consolidationî and financial sector reform to be addressed.

We consider this statement to be in line with our view that the IMF is generally satisfied with the recently approved 2010 state budget (see our Daily from Apr. 27 for more details) but is going to discuss a number of its parameters, first of all revenue targets, further. The IMFís statement corresponds with earlier comments by Deputy PM Serhiy Tigipko, who said after the Washington visit that ìcertain numbersî had yet to be agreed during an IMF delegationís planned visit to Kyiv in the first half of May.

Olena Bilan

81. Metinvest starts Eurobond roadshow Dragon Capital, Kyiv April 28, 2010

Metinvest, Ukraine's leading metal and mining group, yesterday began a two-week roadshow to market its Eurobond. We expect Metinvest to enjoy strong investor demand and issue $700m of five-year debt at a yield of about 9.0%. (Debtwire) Metinvest plans to use Eurobond proceeds to finance its CAPEX program and for general corporate purposes. The Eurobonds will be fully guaranteed by Metinvest's major operating assets, likely Azovstal, Pivnichniy GOK and Inguletskiy GOK. Azovstal has a $175m 9.125% Eurobond maturing in 2011.

Metinvest has a relatively healthy capital structure with a 2009 Debt/EBITDA ratio of 2.6x, which puts its ahead of many of its peers in the CIS and is sufficiently below the consolidated leverage (Debt/EBITDA) covenant of 3x. At the same time, the group faces some $616m of debt redemptions in 2010 and $500m in 2011. The proposed issuance would significantly ease Metinvest's maturity profile and, together with expected positive cash flow generation in 2010, should enable the company to largely repay or refinance its short-term debts. Moody's has assigned a B3 rating and Fitch B- to the proposed Eurobond.

Olga Slyvynska

82. MHP floats new eurobonds worth $330mn with 9.87% interest bne April 27, 2010

The Myronivsky Hliboproduct (MHP) group, which is a large Ukrainian-based poultry producer, has placed a new issue of five-year eurobonds worth $330mn with a coupon period of 10.25% per annum at a price of 101.452% of face value, which is equal to an effective interest rate of 9.87% per annum, reports Interfax.

Citing a trader of the Phoenix Capital Investment Company Vadym Khomenko, the news agency says that the placement finished on April 22, and demand for the new issue significantly exceeded supply.

In the meantime, the economists at Nomura Holdings and UniCredit says that Ukraine's $40bn budget-saving deal with Russia may push yields on the former Soviet state's debt below 10 percent for the first time in more than two years, rivaling borrowing costs in Greece, reports The Moscow Times.

The newspaper reports says that Russia agreed on April 21 to charge Ukraine 30 percent less for its natural gas in an accord that will help reduce the bailout-reliant country's public deficit to 6 percent this year fr om 8.8 percent in 2009.

In another development, government figures showed on Monday suggest that Ukraine plans to issue a $1.3bn eurobond in 2010 — its first since the global economic crisis — to plug an anticipated budget deficit and repay accumulated debt, reports The Moscow Times.

The newspaper report says that Prime Minister Mykola Azarov's government also foresaw drawing on $2 billion of credit from an International Monetary Fund program and $500 million from the World Bank during the year.

In another development, Metinvest, the largest mining and metals group in Ukraine, is to place five-year eurobonds worth $0.7-1bn with an expected yield of 8.5-9.75% per annum, reports Interfax.

The news agency says that the company started talks with investors on the placement of eurobonds worth $0.5-1bn.

In another development, members of the Mechel coal and steel group arranged $437mn in credit facilities in January-April, reports Interfax.

Citing an annual report issued by the company, the news agency says that they include $100mn at 8% pa from Alfa-Bank, arranged in January and repayable in September this year; EUR25mn from UralSib, arranged in April and repayable in 2011 at 6.5%-7.5%; and $29mn from UniCredit, arranged in March, repayable in 2015 at LIBOR + 5.6%.

83. Mriya attracted financing from the IFC Sokrat 30 April 2010

IFC has approved provision of USD 75 mln in financing to the Mriya [MAYA GR, BUY] agro holding, a major crop producer in Ukraine. The IFC financing consists of a USD 25 mln subordinated loan, another USD 25 mln one-year loan with an option of prolongation, and USD 25 mln in warrant purchases. A warrant is a security that gives its owner the right to purchase a certain number of shares at a specified future date at a specified price. The financing should be used for the construction of three silos with a storage capacity of 100 thsd tonnes each, the purchase of land lease rights for 165 thsd ha, and machinery purchases. The total value of the project for Mriya is estimated to be USD 213.7 mln.

Our view: We consider this news to be POSITIVE for Mriya stock. The provision of financing by IFC confirms the Companyís plans to expand its land bank from the current level of 200 thsd ha to 365 thsd ha by the end of 2010, while we have conservatively estimated an increase by 135 thsd ha. We estimate the total expense of silosí construction at USD 30-35 mln. Another USD 33-35 mln should go towards the purchase of land lease rights and USD 20-25 mln for machinery purchase. In addition to the abovementioned capital expenditures, Mriya should significantly increase its working capital by at least USD 35 mln in 2010 and USD 65 mln in 2011. Thus, the Holding should draw additional financing in 2010-2011 for the realization of its plans.

84. OVGZ placement: NBUís reserve requirement proves effective Astrum April 28, 2010

At the OVGZ placement on Tuesday, April 20, the Ministry of Finance offered 6- month bonds, 12-month bonds, 3-year bonds and another 3-year bond issue (special OVGZs). The government sold bonds for a total amount of UAH 2.9bln.

Astrumís perspective: In line with our expectations, there was a sharp increase in the volume of special OVGZs sold, with the total amounting to UAH 1.2bln. The threshold yield level was 14%. However, the average placement yield was 13.15%. For regular OVGZ series, the yield decline on the short end of the curve exceeded our expectations. The threshold yield level for 6-month OVGZs was 11.5%, with UAH 260m attracted. The 12-month and 3-year regulars were sold with a threshold yield level of 14%. The level for 12-month bonds slightly exceeded our expectations as the government chose 1-year bonds as its main instrument for attracting funds at this auction. These bonds were sold for a total of UAH 1.2bln.

Sergey Fursa

85. OVGZ placement: yields at previous auction's levels Astrum April 27, 2010

The Ministry of Finance will be holding its next OVGZ placement today (Tuesday, April 27) and offer four bonds series. The three regular series include 6-month bonds, 12-month bonds, and 3-year bonds. In addition, there shall also be special OVGZs provided to finance preparations for the Euro-2012 competition.

Astrumís perspective: We expect that the main development at todayís placement will be an increase in demand for special OVGZs on the back of a tightening of requirements for bank reserves that should increase attractiveness of special OVGZs for local banks. In our view, the tightening of the NBU reserves requirement could fetch up to UAH 6bln in banking system resources, which points to a potential maximum volume of new demand. At the same time, we expect that there will be no significant changes at the placement of regular OVGZs with threshold yields at the levels of the previous auction. We see the threshold yield level on the short-end of the curve at 12.0%-12.5%, for the 12-month bonds the threshold level should be 13.0-13.5%. At the same time, the level for 3-year bonds should remain at 14%.

Sergey Fursa

86. Real wages up 5.7% y/y in 1Q10 Astrum April 27, 2010

According to the State Statistics Committee, the average monthly wage in Ukraine stood at UAH 2,109 in Marchí10. In real terms, the wage grew by 7% y/y, while in nominal terms, it grew by 18.3% y/y. In 1Q10, the average real wage increased by 5.7% y/y, while the nominal wage grew by 17.2% y/y.

Astrumís perspective: March figures fare slightly better than our expectations. Strong growth in wages was led by the industrial sectors of the economy: the average nominal wage in the extraction industries grew by 22.7% y/y, wages in the steel sector increased by 27% y/y, and transport machinery boasted a wage growth of 28%-43% y/y. This points to the fact that the ongoing recovery is increasingly translating into wage growth, supporting our view that the unemployment trend has finally reversed. We expect that the real average annual wage in Ukraine will grow by 0.5% in 2010, with real disposable income increasing by 1%. At the same time, if April figures prove to be better than our expectations and the State Budget, which envisages a 38% growth in the minimum wage on average in 2010 is finally approved, we might improve our forecasts for wages, disposable income, and hence, for household consumption and the retail sector.

87. Ukraine C/A runs $0.2bn deficit in March Dragon Capital, Kyiv April 26, 2010

Ukraine's current account (C/A) gap widened to $239m in March from a (revised) $57m deficit in February. (NBU) The deterioration was driven by the merchandise trade deficit, which doubled m-o-m to $0.7bn, as the service trade surplus stood virtually unchanged at $220m. Goods exports rose 16% m-o-m last month (+24% y- o-y) to $4.0bn on account of steel, machinery and chemicals. Imports grew 25% m- o-m (+25% y-o-y) to $4.7bn, led by stronger imports of fuels, raw materials (partly due to stronger demand from export-oriented industries) and machinery. In particular, machinery imports surged 19% m-o-m and 38% y-o-y in March, indicating a revival in domestic investment demand.

Should investment demand keep growing, it will be conducive to deterioration in the C/A balance, offsetting the positive effect of lower gas prices (last week's Ukrainian- Russian gas agreement implies the gas price for Ukraine will fall to an estimated $263/tcm from $328/tcm on average this year). However, we see upside risk to our current C/A deficit forecasts of 0.4% of GDP in 2010 and 1.1% of GDP in 2011 and will revise them soon.

Olena Bilan

88. Ukraine's financial account (F/A) posted a $1.3bn surplus in March, reversing from February's $0.6bn gap and bringing its 1Q10 balance to - $0.6bn. (NBU) Dragon Capital, Kyiv April 26, 2010

The most notable development seen last month was a reversal of resident-based flight to foreign cash on the back of gradual hryvnia appreciation, which resulted in $0.3bn of foreign cash inflows to the banking system for the first time since May 2009. Net debt capital flows also became positive last month, totaling $0.4bn, on account of government borrowings (purchases of domestic UAH-denominated government bonds by non-residents) as well as increased private sector debt inflows. Banks attracted $86bn of debt on a net basis last month, mostly rolling over redemptions of long-term liabilities using new short-term borrowings, bringing the sector's debt rollover rate to 103% from 92% in February. Corporate sector debt rose by $0.2bn last month, implying a roll-over rate of 134% (vs. 58% in February). Finally, FDI inflows grew to $0.5bn in March (from $0.3bn in February) on account of the banking sector, bringing 1Q10 FDI to $1.0bn (+11% y-o-y).

Olena Bilan

89. VAB Bank posts 1Q10 net loss of $13m Dragon Capital April 26, 2010

VAB Bank, #27 by assets in Ukraine, reported net losses of $13m for 1Q10 following losses of $28m in 4Q09.

VABís end-1Q10 LLR reached 13.7% of gross loans (+1.5pp q-o-q but still less than needed assuming its actual NPLs are in line with the sector average of 20-25%). Given its end-2009 CAR of 13.9%, VAB Bank requires additional capital. Its EGM scheduled for Apr. 28 is due to approve a UAH 385m (71%) share capital increase. We expect most of the new shares to be bought by the bankís Dutch shareholder, TBIF Financial Services.

VABís deposit base improved slightly in 1Q10 (+8% q-o-q) on a 13% q-o-q increase in retail deposits. VABís F/X liabilities stood at $455m (57% of total liabilities) as of end-1Q10, while cash and cash equivalents totaled $104m.

The bankís $100m restructured Eurobond is currently priced at 85.5-87.5% of par, yielding 14.5-15.2%.

Olga Slyvynska,

90. XXI Century capitalizes US$ 14mn Eurobond interest payment BG Capital April 29, 2010

XXI Century (XXIC LN) announced it will capitalize a US$ 14.4mn interest payment on its US$ 175mn Eurobond that was coming due on May 24. Following this capitalization, the total principal amount outstanding will be US$ 206.6mn.

Alexander Romanov: The interest payment capitalization was fully expected as the developer has no funding sources to service its total debt, which now stands at US$ 289mn. With its only operating object (the Kvadrat Perova shopping mall) barely covering operating expenses and demand virtually inexistent for the developerís portfolio, the majority of which is in the very early stages of development, we believe XXI Century will continue to face difficulty servicing its debt in the coming years.

KAZAKHSTAN CREDIT 91. Kazatomprom to sell its first Eurobond Visor Capital April 27, 2010

Bloomberg News Agency yesterday announced that Kazakhstan’s National Atomic Company, Kazatomprom, plans to sell its first Eurobond. Fitch Ratings assigned Kazatomprom’s proposed notes an expected senior unsecured rating of BBB-. We do not expect any significant share impact on any listed stock.

92. Amsterdam Trade Bank may claim Almaty International Airport collateral for unpaid debts bne April 27, 2010

Amsterdam Trade Bank N.V. has warned that it may confiscate property of JSC Almaty International Airport if outstanding debts are not paid.

Almaty International Airport received a $333m loan from the bank, a subsidiary of Alfa Bank, in 2007. This became due in March 2009 but has not yet been paid back.

According to Amsterdam Trade Bank, construction of a new international terminal in Almaty has also not been completed on schedule.

“All of the borrowed funds have been spent, the loan has not been repaid and the construction of the new terminal has not been completed,” the bank said in a statement quoted by Interfax Kazakhstan.

93. GDP grows by 6.6 percent in Q1 SRI April 28, 2010

Kazakhstan’s economy grew by 6.6 percent year-on-year in the first quarter of 2010, President Nursultan Nazarbayev said on Tuesday. In the first quarter of 2009, Kazakhstan’s GDP declined by 2.2 percent.

The Kazakh government forecasts that the economy will grow by 2.0 percent compared with growth of 1.2 percent in 2009.

94. Kazakh money supply increases 1.4% MoM, 14.4% YoY to US$52.7bn in March Visor Capital April 26, 2010

Growing money supply limits supporting factors for stronger KZT. We expect that KZT will appreciate moderately by YE2009. Our current YE2010F forecast is KZT145/USD.

Money supply increased 1.4% MoM, 14.4% YoY to KZT7.8tr (US$52.7bn) in March. Given US$52.5bn of total foreign reserves of Kazakhstan (including the foreign- currency-denominated part of the National Fund), the money supply coverage ratio is at 100%, which is at par with the National Bank’s implicit medium-term target, in our view.

Given that we believe that there is an implicit National Bank strategy to keep total foreign reserves to money supply ratio at 100%, we note that growing money supply limits supporting factors for stronger KZT. Nonetheless, this is countered by the fact that total foreign reserves are growing due to high oil and gas prices on international markets.

We have forecast that KZT will appreciate moderately by YE2010F to KZT145/USD.

95. Korean Shinhan Bank to help KMG EP raise $500 million SRI April 26, 2010

Korean Shinhan Bank will reportedly help KazMunaiGas Exploration Production (KMG EP) raise $500 million to build an oil-loading terminal in Kazakhstan, Bloomberg reported last week.

The bank has agreed to advise KMG EP on project financing, according to an e- mailed statement.

EURASIA CREDIT 96. Armenia: EurAsian Development Bank to provide a $20mln loan to ArmBusinessBank Arminfo April 29, 2010

EurAsian Development Bank will provide a $20mln loan to ArmBusinessBank (ABB) CJSC, said Igor Finogenov, Chairman of the Eurasian Development Bank Board, at the official opening of the Eurasian Development Bank Office in Yerevan on Tuesday.

He said that relevant agreement was signed on April 27. The loan funds will be used for on-lending to SME via ABB. It is the first loan agreement of the Eurasian Development Bank with an Armenian company.

The statutory capital of ArmBusinessBank as of Jan 1 2010 amounted to $35.6mln, total capital - $43.4 million, assets - $247.7mln. Net profits for 2009 totaled $2.8mln and grew 21% versus 2008. The shareholder of the bank is the Ukrainian Christy Management Company.

The same day in Yerevan the EurAsian Development Bank signed a Memorandum of Cooperation with the Ministry of Energy and Natural Resources of Armenia and other memorandums with Armenian big companies with Russian capital: ArmRusgasprom CJSC, International Energy Corporation CJSC, South Caucasus Railway CJSC.

97. Armenia: In Q1 2010 nominal effective AMD rate rose by 3.3% Arminfo April 28, 2010

In Q1 2010 the nominal effective AMD rate rose by 3.3% while the EUR and RUR rates dropped.

The press service of the Central Bank of Armenia reports that during its meeting Apr 13 the CB's Board pointed out that, despite periodical AMD depreciation, in Jan-Mar 2010 the AMD/USD exchange rate remained almost unchanged as compared with Jan-Mar 2009.

The CB's steps to gradually toughen its monetary-credit policy by raising the rate of refinancing by 1.5% to 7% and by rigidly controlling the money supply have led to curtailment of the monetary base and monetary aggregates and have had a deep effect on AMD components. In Q1 2010 the REPO rates grew by 3%-4% while the yield of government bonds remained unchanged.

In order to curb inflation, the CB is closely complying with the Government's anti- crisis measures to reduce the budgetary deficit by saving budgetary funds and to preserve the current rate of tax collection. This will help to keep inflation within the target level.

Apr 13 the CB raised the rate of refinancing from 6.5% to 7% while the deposit and lombard REPO rates were set at 4% and 12%, respectively.

98. Azerbaijan: CB Notes placement results APA-Economics April 29, 2010

On April 28, 2010 an auction on placement of short-term notes of Central Bank with the state registration number 50101625S, total volume AZN 5 000 000, volume put- up to the auction AZN 4 000 000, face value per note AZN 100, and turnover period 28 days was carried out on Baku Stock Exchange.

Total volume of orders submitted by 2 investors made AZN 24 299 800 at face value.

The orders were submitted with the 99.9226% (YTM 1.00%) price.

Central Bank set cut off price on competitive orders in the amount of 99.9226% (YTM – 1.00%) and weighted average price in the amount of 99.9226% (YTM – 1.00%).

Volume of Notes realized at face value formed AZN 4 000 000, including noncompetitive orders of AZN 796 700

The maturity date of Notes is May 26, 2010.

99. Azerbaijan: CGB placement APA April 27, 2010

On April 27, 2010 from 11:00 am till 12:30 pm the auction for placement of one- year callable government bonds (CGB) will be held at BSE.

Emitent: Azerbaijan Ministry op Finance

Type of valuable paper: one-year callable government bonds

State registration number: 10500828S

Date of Auction: 27.04.2010

The volume of the isue (mln. AZN): 4

Face value (AZN): 100

Interest rate (%): 3,75

Term of circulation (days): 364

Interest payment dates: 26.10.10, 26.04.11

The maturity date: 26.04.2011

Noncompetitive bids not exceeding 20% of the issue volume are allowed at the auction.

Issuer has the right not to admit the bid if the total volume of orders for bonds purchase submitted by auction participants is less than 30% of bond volume put up for auction by Issuer.

100. Georgia: Debtor Registry Records Grow 1.7 times for a Month and Half GBC April 28, 2010

The quantity of debtors has increased 1.7 times in the Debtor Registry for a month and half.

Sandro Barnabishvili, deputy head of the Tbilisi Enforcement Bureau, told GBC the Debtor Registry currently records 2 172 individuals, while the figure marked 1 254 individuals as of March 10, 2010.

Court decisions have been forwarded to 2 572 debtors and only 400 debtors have managed to pay the liabilities within the legislation-defined 7 days, he added.

Borrowers, who have taken loans without guarantees, and execution procedures have been instituted against them, are included in the registry, Barnabishvili noted.

"Borrowers are enabled to pay up credits in 7 days after they receive a notification on a court decision. After this period, the executor is authorized to identify, audit, seize and sell the property of the borrowers", he says.

If debtors fail to pay the loan in seven days following the reception of a court notification, the property will be audited and seized for a month. The property will be put up for auction in a month after the asset arrest.

101. Tajikistan to see 5%-6% GDP growth annually in 2010-2012 bne April 30, 2010

Tajik President Emomali Rahmon says that the global financial crisis has significantly affected Tajikistan's economy, but the country has managed to maintain its growth, and Tajik GDP will grow 5%-6% annually within the next three years, reports Interfax.

The news agency quoted Rahmon as saying that a mid-term socioeconomic development plan for the next three years also envisions that inflation should not be higher than 8%-10% a year.

102. Tajikistan: Money wires contribute one-third to Tajikistan's 6.8% GDP growth in Q1 RIA Novosti April 27, 2010

The economy of Tajikistan grew 6.8% in the first three months of 2010 to over $890 million, with money transfers from abroad constituting one-third, Tajikistan's National Bank said on Monday.

Money transfers increased 5.6% in January-March 2010 from the same period last year, following improvements in the world economic situation and on migrant labor markets.

With a population of about 7 million, practically one out of every ten Tajiks from the impoverished ex-Soviet Central Asian republic works abroad, mostly in Russia, to make ends meet and feed their families at home with money transfers.

Last year, money transfers to Tajikistan dropped 31.3% due to the global economic and financial crisis and negative effects on the Russian economy which provides jobs to 90% of labor migrants from Tajikistan.

103. Tajikistan: Rakhmon forecasts 5-6% economic growth in near term bne April 26, 2010

Tajikistan’s economy is expected to grow by 5-6% a year between 2010 and 2012, President Emomali Rakhmon said in his annual address to parliament.

Inflation is not expected to rise above 8-10% a year during this period, Rakhmon said April 14.

Tajikistan has managed to maintain GDP growth during the international economic crisis. However, damage caused by the crisis to the Tajik economy is estimated at over 1 billion somoni ($241.3) and it continues to have a negative impact, Rakhmon told MPs.

The first quarter of 2010 saw an improvement of the economic situation compared to in 2009. “GDP rose 6.8% over the report period, which is 3.2% more than in January-March 2009,” Asia Plus quotes the president as saying.

“In January-March 2010, the volume of production of industrial goods increased by 16.3% and the gross agricultural product has increased by 5.7%. Retail trade has grown by 21% and the volume of paid services rendered to the population has grown by 12%.”

Rakhmon also outlined the government’s economic policy priorities. "The main purpose of the Tajik economic policy is to ensure sustainable economic development, and all our plans are focused on three strategic goals, that is, guaranteeing energy sovereignty, bringing the country out of the communications deadlock, and ensuring food security, and all this is being done systematically," Interfax quotes Rakhmon as saying.

Rakhmon also said that Tajikistan has had some success in combating poverty, with the number of people living below the poverty line falling from 73% in 2003 to 50% in 2009.

"A strategy for 2010-2012 envisions effective implementation of essential measures to ensure sustainable social and economic development, which will enable us to reduce the poverty level to 40% by the end of 2012," he said.

BELARUS CREDIT 104. Belagroprombank to borrow $800m from abroad this year bne April 30, 2010

Leading state-owned agricultural bank Belagroprombank says it plans to raise over $800m in borrowing from the international capital markets this year, reports Prime Tass.

Belagroprombank CEO Sergei Rumas said: "We plan to attract about $800m in loans for the economy in 2010, despite the continuing effects of the global crisis. In the first quarter, $250m were attracted, and I believe we will achieve the target by the end of the year," the newswire reported.

Last year the bank raised over $230m from abroad.

Belagroprombank, Belarus' second-largest commercial bank, reported a 62.6% increase in profit in January-March to BYB54.8bn.

Most of last year's borrowing was raised from the members of the International Confederation of Agricultural Credit (CICA).

CE CREDIT 105. Political attacks on central bank chief could lead to a halt of the easing cycle Equilor April 29, 2010

Barclays Capital said yesterday that the intensifying verbal attacks from Fidesz, the newly elected government-party against Andr·s Simor, head of the National Bank (MNB) will lead to a halt of the monetary easing cycle. Barclays systematically compares the tone used by the Monetary Council (MC) members after their rate setting meetings (this Monday the MNB slashed the benchmark interest rate by 25 basis points to record low of 5.25%). According to Barclays "the MNB will not respond to the political attacks, but if the political 'noise' continues to add risk premium back to HUF assets, the MC has a reason to halt the easing cycle... We will follow the process closely." Yesterday Zolt·n Pokorni, vice-chairman of Fidesz openly asked Andr·s Simor to resign. Barclays thinks that the local rates already reacted to this. Euro/forint was traded at HUF 270 in the early morning, the US dollar price jumped to HUF 205.5, while the Swiss franc was traded at HUF 188.6

106. Baltics says Greece must copy their model to ease fiscal crisis bne April 26, 2010

Greece must deploy budget cuts on the same scale as the Baltics to survive its debt crisis and sacrifice economic growth to restore fiscal health, Latvia's central bank governor and Lithuania's finance minister said, Bloomberg reported.

The Baltic nations, whose fixed exchange rates last year forced them to execute the European Union's toughest austerity packages to protect their finances, suffered the 27-member bloc's deepest recessions. Latvia's economic output slumped an annual 19 percent in the third quarter, Lithuania's contracted 19.5 percent the previous quarter, while Estonian output dropped 16.1 percent in the same period. All three had their ratings outlooks raised last month at Moody's Investors Service.

Greece today called for the activation of a 45 billion-euro ($60 billion) emergency loan from its EU partners and the International Monetary Fund as the government struggles to meet soaring debt costs. The yield on Greek two-year bonds yesterday jumped above 10 percent, more than double the rate on Latvia's 2014 note. Latvia cut public spending by 10 percent of gross domestic product last year after receiving a 7.5 billion-euro EU and IMF-led loan in 2008.

"The Greek situation is similar to Latvia's in that there is no other choice but to downsize expenditures," Latvian central bank Governor Ilmars Rimsevics said in an interview last week. "We are very pleased that Latvia is more and more mentioned as a template because a year ago people were thinking we are going to fail. Today, things are more or less out of the woods."

Greece is more likely to default than all the EU's emerging members, credit default swaps show. The cost of insuring against Greek default jumped to an all-time high yesterday and Greek 10- year yields rose to the highest since at least 1998.

After Greece's announcement of the rescue request, the 2- year yield declined 82 basis points to 9.481 percent. The yield premium on 10-year Greek bonds over bunds narrowed to 500 basis points from 590 basis points.

Credit-default swaps tied to Greece's government bonds climbed 158 basis points to a record 650 yesterday, according to CMA DataVision prices, after the European Union's Luxembourg- based statistics office said its budget deficit may have exceeded 14 percent of GDP last year. Greek CDS fell 54 basis points to 591 today.

107. Ciech signs debt refinancing agreement Wood April 27, 2010

Yesterday after the close the management of Ciech stated that following 8 months of negotiations the company has signed a debt refinancing agreement with a consortium of banks (Pekao SA, Bank Handlowy, BRE Bank, PKO BP, ING Bank, Bank Millennium and DNB Nord Polska).

The agreement covers 70% of Ciech's debt or PLN 1.34 bil, including FX options liabilities. The remaining debt amounts to PLN 0.5 bil (PLN 300 mil bonds and a EUR 55 mil bank loan to its German subsidiary). The key terms of the agreement are as follows:

- the agreement is binding till the end of 2011.

- quarterly amortisation of debt of at least PLN 10 mil by March 2011.

- overall debt reduction by PLN 400 mil by March 2011 - either through operating cash flow, disposal of assets, or the issue of shares or convertible bonds.

- the debt needs to be repaid immediately if the Treasury sells its shares or if there is a new majority shareholder in the company without the consent of the bank consortium.

- any capital raised should be fully used to repay debt until PLN 400 mil is paid.

- starting from 1Q11 - 75% of the quarterly cash flow needs to be used for repayment.

- any proceeds from the disposal of assets need to be used for repayment.

- no dividends can be paid or new debt taken on, and there are also covenants which will be checked on a quarterly basis (incl. net debt/ EBITDA and interest coverage).

POSITIVE

The debt restructuring could, in our view, trigger a positive market reaction today, although the repayment of PLN 400 mil by March 2011 seems to be quite an aggressive target, unless the company succeeds in its planned divestments or issues new shares.

108. Retail sales jump and sentiment strengthens Wood April 26, 2010

Retail sales jumped by 8.7%yoy in March, up from an surprisingly weak 0.1%yoy in February and 4% expected. Car sales increased by 3.8%yoy, up from -12.8%yoy in February.

Adjusted for inflation, retail spending increased by 5.9%yoy, from a 2.8%yoy contraction. Spending on food, tobacco and beverages rose by 4.4%yoy, up from -8.3%yoy, the visible rise is partly due to favourable base effects. A notable improvement was recorded in housing related products, non-specialised stores and pharmaceuticals and cosmetic items. Sales of books, newspapers and other specialised stores instead dropped further maintaining a clear downward trend.

[control]

The latest consumer surveys released by the statistical office showed encouraging improvements in expectations, particularly households' 12m forward view of their financial situation, approaching the all time highs seen in 2007, and a gradual reduction of unemployment fears. That being said, the current conditions confidence fell a touch and seems to be moving sideways since late last year. These patterns indicate that the weak labour market continues to weigh on the current financial position of consumers, but the global recovery and probably the packed election calendar is supporting expectations of improvement in the coming year.

On the business front, manufacturing and construction sectors confidence rose further in April and their expectations of their financial position in the coming year improved further. Employment intentions rose a touch again, adding to the expectation of a gradual healing of the labour market. However, the survey results were not uniformly upbeat as the manufacturing expected orders index dropped modestly, as did the construction index on the current economic condition and expectation of future production value.

POSITIVE

Retail sales recovered sharply in March, probably boosted by better weather, the approaching Easter holidays and an increasingly visible economic recovery. We expect spending to remain volatile in the coming quarter, as the improvement in the labour market is likely to remain gradual.

Business confidence has continued to improve on average in April, but the message of the surveys is not uniformly positive. Although the recovery is well on track, we expect the MPC to remain cautious and prefer to err on the dovish side in coming quarters. We maintain the expectation of flat policy rate in the coming year.

109. Czech central bankers make dovish comments Erste April 26, 2010

Two CNB board members (V. Tomsik and M. Hampl) made dovish comments last week. Both perceive the rate at which the CZK had recently strengthened to possibly be enough of a concern to prompt a further rate cut. While Tomsik made his dovish leanings clear back in March (he voted for a cut), Hampl's comments came as a bit of a surprise. We tend to view this as more of a verbal intervention aimed at forestalling what could become a dangerous slide below 25. Tomsik's comments came almost in sync with the escalation of the crisis around Greek debt (the EC said that the deficit last year was higher than previously estimated, shattering what trust there may still have been in Greek data), sending the crown to almost 25.50. This factor, alongside the generally good data coming in from Germany and France (orders, indices), which will show up in the Czech Republic, should placate the dovish wing of the board; we do not expect another cut. Speculation is rife in the market that a cut will be delivered, but we think that Tuma (two votes, still the governor), Rezabek and Holman will prevent this. The Czech auction of 15Y paper proved another success, driving yields down - the MinFin is still sticking to its strategy of restraining the local supply. This drove yields 80bp lower than in February (when the same paper was issued), with the ASW spread contracting from almost 130bp to around 90bp. So far, the MinFin has issued CZK 49bn worth of paper this year, a mere 18% of the estimated gross financing need of CZK 280bn. Even with a Eurobond worth EUR 2bn, 65% of the total gross financing will need to come in 2H10 - with most, if not all, on the local market. This is certain to drive yields higher.

110. Czech economy seen growing a moderate 1.5% in 2010 KB April 29, 2010

The Czech economy should grow a moderate 1.5% in 2010, after a drop of 4.1% last year. The expected increase in GDP will, however, be only due to the positive contribution of inventories; other components should contribute negatively to growth. Growth will be limited by the termination of foreign car-scrap subsidies and domestic fiscal restrictions that affect mostly household consumption. Furthermore, household consumption will be negatively influenced also by the still unfavourable situation on the labour market.

Inflation should gradually grow toward the CNB target of 2% this year. The acceleration in inflation growth should be very moderate; still-weak consumer demand will not allow for more significant growth at the price level. Overall, we expect an inflation rate of about 1.5% this year and 1.9% in 2011. The inflation target of the CNB, at 2.0%, should not be in jeopardy.

The key CNB interest rate should already be at its bottom. However, the recent significantly dovish comments of CNB board members suggest there is a risk of another cut at the May meeting. Vote of the governor will probably be decisive. The first rate hike should come in Q410, and the key rate should reach 1.25% at the end of this year. The normalisation of the key rate toward neutral levels should continue also in 2011.

The decline in CZK yields is overdone, in absolute terms and over EUR peers. We expect a rise in yields during Q210 and the IRS curve should flatten gradually. Unless the Czech government bond issuance on foreign markets increases markedly, remaining financing needs could lead to significantly higher asset swap spreads in H210 on the domestic market.

The EUR/CZK exchange rate returned to its appreciating trend, and the volatility has decreased to levels occurring before Lehman Brothers' bankruptcy. The Czech currency actually shows only modest signs of overvaluation. The more favourable macroeconomic picture of emerging markets, including the Czech Republic, and lower risk aversion is behind our view that CZK will strengthen on the 1Y horizon. The main risks to this scenario are the possible second wave of the recession after the termination of fiscal stimuli or debt crisis in some important countries, which would have negative implications on portfolio investments into more risky assets.

The PX index's volatility increased in recent months as it outperformed both the European DJ Stoxx600 and the U.S. S&P500. Q110 brought growth for most traded stocks with the cyclicals such as NWR and CME in lead. However, despite the higher share price, trading volumes didn't increase on the PSE.

We expect the risk of a market-wide correction on equity markets increases since most indices are close to their 18-month highs. Nevertheless, we believe the PX index could be in one year at a mildly higher level than where it is today (28 April).

We now prefer stocks linked to commodities, especially CEZ and NWR. In the framework of sector rotation, we turned rather negative for traditional defensive issues, Telefonica O2 CR and Philip Morris CR. We keep a negative opinion on real estate developers.

111. Czech elections - potential government coalitions Wood April 29, 2010

The Czech business daily Hospodarske Noviny (HN) has come up with its own forecast regarding the upcoming parliamentary elections (May 28/ 29) and potential government coalitions. HN predicted that:

- there is a 40% chance that the Social Democrats (CSSD, the main opposition party) will win the parliamentary elections next month and will form a coalition with the Christian Democrats (KDU-CSL) and TOP 09 (a former part of KDU-CSL)

- there is a 30% chance, HN predicted, that CSSD will win the elections by a slight margin but that ODS (Civic Democrats, the former leading government party) will form a government with TOP 09, Veci Verejne (a newly-created party, centre-rightish) and perhaps the Greens

- there is a 20% chance that CSSD will form a minority government with the help of the Communists

- there is only a 10% chance of a grand coalition (CSSD-ODS), HN said.

NEUTRAL

These scenarios are very much in line with the current opinion polls and our expectations. CSSD will probably win but numbers and the support of a few small parties (such as KDU-CSL, the Greens, VV or TOP09) are what matter most in the upcoming elections as a wide range of government coalitions seems possible.

A CSSD-Communist government coalition (either official or with hidden support) would clearly be the worst possible outcome, something investors might react to by selling Czech assets significantly following the election results.

112. Czech FinMin said to suggest govt should take higher dividends from state firms KB April 30, 2010

Reuters Czech Finance Ministry suggested the government should take higher dividends from state-owned companies reported that the. Although it was not specified, this probably refers mostly to CEZ, by far the largest Czech state-owned company. We believe this is neutral news as we as well as the market see an upside risk for dividends this year. At the moment, we expect a dividend of CZK 55 per share from 2009 profit (10% up yoy), but might change our forecast after the parliamentary elections at the end of May.

113. Czech FinMin to propose more austerity measures for this year's budget bne April 28, 2010

Czech Finance Minister Eduard Janota will propose further austerity measures for this year's state budget as hitherto development shows the government would not keep the planned public finance gap of 5.3 percent of GDP without savings, Janota said after the cabinet meeting Tuesday, CTK reported.

"It is unacceptable both for the Prime Minister (Jan Fischer) and me to diverge from the planned 5.3 percent. I will propose further restriction of budget expenditures and reassessment of expenditures within privatisation account funds," Janota said.

"The government's priority is to achieve 5.3 percent (of GDP)," he added.

Janota reiterated today he was going to draft next year's state budget with a public finance gap that would not exceed 4.8 percent of GDP.

This year's budget reckons with revenues of about Kc1,022bn and expenditures of Kc1,185bn. Deficit is to reach around Kc163bn.

Regarding the growing sensitivity of financial markets to the size of deficits and debts, Janota's effort is understandable, Patria Finance chief economist David Marek said.

"The Finance Minister cannot expect support from the parliament as no deputy will probably support budget cuts enthusiastically before the upcoming elections, so the only possibility left is the effort to restrict operating expenditures of individual ministries, including wage costs," Marek said.

According to UniCredit Bank analyst Pavel Sobisek, Janota meant that restrictions would concern mainly public investments. "The government does not even have another possibility. Cuts in operating expenditures of individual ministries have already been made, further flat cuts are hardly feasible and there is not enough time to to carry out a process audit that would lead to selective saving," Sobisek said.

Cuts in the social sector would be most effective but these would have to be passed by the parliament where such a proposal has no chance of succeeding before elections, Sobisek said.

"Even though restriction of investments is the least convenient variant of saving, the government has not much to choose," Sobisek said.

Based on the government's decision from January, individual ministries will not be able to use 5 percent of expenditures and 1 percent of money earmarked for wages this year. The aim is to keep the approved state budget deficit at Kc163bn.

According to the cabinet's decision, Janota is to inform the government about how public finances and economy are developing by May 20. After that the government will decide whether the restriction of ministries' expenditures will continue or not.

Janota has already outlined his proposals for austerity measures in the Convergence Programme. The planned savings should reduce the public finance deficit below 3 percent of GDP in 2013. This year the deficit should reach 5.3 percent of GDP, in 2011 4.8 percent of GDP and in 2012 4.2 percent of GDP.

Last year's public finance gap reached 5.93 percent of GDP. The threshold for euro adoption is 3 percent.

114. Czech govt urged to cut deficit as Greek drama unfolds bne April 30, 2010

The Czech Republic is not in a crisis like Greece, but the situation is serious and it requires that the state budget deficit be really decreased, though it need not be done within one year, but gradually, economist Jan Svejnar told today's issue of daily Mlada fronta Dnes (MfD).

"Expenditures must be effective, revenues must be improved and we must keep foreign investment," Svejnar said.

Czech-born Svejnar, 57, is based in the United States. He is economics and public policy professor at Michigan University. In 2008 he unsuccessfully ran for Czech president. Since 2003 Svejnar has headed the supervisory council of Ceskoslovenska obchodni banka bank (CSOB).

Svejar told MfD that the Czech Republic can no longer increase its deficit, with the exception of cases where the return on spending would be higher than interest rate for which it borrows money for it.

"I mean investment in education, for instance. It really has a high return," Svejnar said.

In the Czech Republic, however, investment often goes to spheres in which it is loss- making. "To put it brief, the money is eaten up. This is unacceptable and dangerous for the future," Svejnar said.

The state budget deficit for this year has been projected at 163 billion crowns, or 5.3 percent of GDP.

Svejnar said he would cut spending in the civil service and investment in infrastructure.

"This is not to say that we do not need better roads and railways, but orders of this type are often overpriced, sometimes scandalously," Svejnar said.

Turning to Europe, he said states will interfere even more in the market economy in the future. It will be regulated capitalism.

"The communist experiment in Central and Eastern Europe was, however, such a failure that it (the interference) will not lead back to socialism," Svejnar said.

He said the states will, however, interfere more in the financial sector in the wake of the current economic and financial crisis.

They will exert much greater effort to prevent breakdowns of financial institutions and they will apply a stronger supervision and regulation, Svejnar told MfD.

He said he thinks that the Czech Republic should not accept the euro without fulfilling all criteria.

"We could have entered the euro zone five and more years ago, but the political will was lacking. The feasible date for the adoption of the euro is 2015 or 2016. It would be advantageous for our economy in the long term," Svejnar said.

115. Czech pension system deficit to reach EUR1.38bn bne April 26, 2010

The pension account will reach a deficit of CZK 35 billion (EUR1.38bn) this year, according to the estimates of the Finance Ministry, Deputy Finance Minister Bohdan Hejduk told Czech Television yesterday. After the first three months, the account is short of over CZK 10 billion, Hejduk said, adding that roughly CZK 5 billion fewer were collected than expected.

116. Czech rates seen at bottom and will stay there until Q3 KB April 28, 2010

--Domestic and foreign factors do not clearly indicate that the new inflation prognosis of the CNB should be revised downwards. Nevertheless, the comments of the central bankers were dovish recently. The decisive vote to cut or to keep the interest rates unchanged will probably lie with Governor Z. Tuma. --We think the key interest rate of the CNB is at its bottom and will stay at its level of 1% until the third quarter of this year. Normalisation of the rates to standard levels should begin in Q410. By the end of this year, we expect the key interest rate of the CNB at 1.25%.

Compared with the last CNB prognosis, inflation in March is only 0.1pp lower, the deviation being caused by adjusted inflation. Neither did the quarter-on-quarter GDP dynamics differ much. The household consumption had an anti-inflationary effect, although this was rather due to a change in methodology. Neither does the EUR/CZK exchange rate significantly differ from the CNB prognosis. Looking at the external environment, inflation in the eurozone is higher, and USD is significantly stronger (against EUR), which forces import commodity prices to increase. An opposite effect might have a lower than assumed increase in future Euribor rates, priced by the market, which was also mentioned in the last minutes from the bank board meeting. With a closer look on the factors mentioned above, it is not clear whether the new CNB prognosis will be revised downward. Moreover, it is possible that the CNB was also surprised upward by the movement of import prices and the inflationary expectation of corporations, which could have a significant effect on the inflation prognosis. As the new inflation prognosis of the CNB should not be revised in the downward direction, the implied 3M PRIBOR should move closer to our prognosis (3M PRIBOR was 22bp higher compared with the CNB prognosis in Q110).

Recent comments by Czech central bankers were in the dovish tone. The comments of M. Singer and V. Tomsik confirmed they will probably vote for the interest rate cut (these two members voted for this step in the March meeting). They could be joined by M. Hampl, who mentioned anti-inflationary risks. Because there will be only six members present at the May meeting (E. Zamrazilova will be missing), Governor Z. Tuma will have the decisive vote. The other two members of the board will probably vote for stable interest rates. The comments of CNB board members have thus indicated that the risk of cutting the interest rates at the May meeting is high. We think the CNB key rate has bottomed out and will stay at the level of 1.00% until Q310. The normalisation of the key interest rate should start in Q410, and we project a key rate of 1.25% by the end of this year. Currently, the biggest risk to our scenario is that the board could cut the key interest rates at the May meeting; the risk increases in the case of further CZK appreciation. On the other hand, the macroeconomic fundamentals rather do not support another cut. We see inflation gradually moving toward the CNB target, and the external environment evolves well, including Germany. This will show up in the Czech industry and with some delay also in other parts of the economy. Adjusted inflation is in the red numbers, pointing to deflationary pressures in the economy; this can be taken as an argument for lower interest rates. However, this decrease in prices is to a big extent due to changes in the consumer basket and higher indirect taxes, which led to a decrease in profit margins (weak demand and competition did not allow retailers to move higher taxes to consumers; nevertheless, this can still happen in the future, when demand recovers). Moreover, inflationary expectations of corporations increased, so there are no emerging deflationary expectations in the economy.

In the case the CNB does not cut interest rates, which is our main scenario, the interest rates should increase on the money market. In the case of the cut of interest rates by the central bank, the PRIBOR rates will decrease; nevertheless, it is probable that part of this decrease will be compensated by a growth in the excess liquidity premium (moreover, a big part of the cut of the interest rates is already priced in). Therefore, in the case of the risk scenario realisation, the rates should not decrease significantly any more. This is in accordance with our strategy for paying short IRS rates (see the part Fixed Income in Economic Outlook for Q210).

117. Eurostat Confirms Estonian Govt Deficit in 2009 at 1.7% of GDP bne April 29, 2010

Eurostat, the statistics agency of the European Union, confirmed the Estonian government deficit in 2009 at 1.7 percent of gross domestic product, which matches the figure supplied by Statistics Estonia, Oreanda reported.

The EU27 government deficit was 6.8 percent and the euro area deficit, 6.3 percent of GDP. Latvia and Lithuania recorded deficits of 9 percent and 8.9 percent, respectively.

Both the national statistics office and Eurostat put Estonia's government debt in 2009 at 7.2 percent of GDP which Eurostat said was the lowest across the 27-nation bloc.

The debt level of EU countries averaged 73.6 percent and that of the euro area, 78.7 percent of GDP. The Latvian government debt ratio was 36.1 percent and the Lithuanian, 29.3 percent.

118. Estonia Retail Sales Decline In March bne April 30, 2010

Statistics Estonia announced that the retail sales of goods of retail trade enterprises dropped 9% on an annual basis in March, compared to the 10% fall in the previous month, RTTNews reported.

Retail sales of food, beverages and tobacco in specialized stores grew 44% annually in March, while the retail sales of second-hand goods in stores rose 11%. Retail sales in stores selling pharmaceutical goods and cosmetics surged 5%.

In March, the retail sales of goods of retail trade enterprises totaled 4.3 billion kroons, the statistical office said.

On a monthly basis, retail sales at constant prices increased 13% in March. After adjusting for seasonally and working-day effects, retail sales decreased by 1%.

119. Estonian Industrial Output Grew Most in 3 Years on Exports bne April 30, 2010

Estonian industrial production rose in March at the fastest annual pace in more than 3 years, as export demand continued to improve, Bloomberg reported.

Output increased 11.6 percent from a year earlier, the biggest increase since August 2006, compared with a revised 4.9 percent rise the previous month, the Tallinn- based statistics office said on its Web site today. Production rose 4 percent from the previous month on a seasonally adjusted basis.

120. Germany opposes the European Union's plan to supervise national budgets more bne April 26, 2010 closely German MPs and government members have strongly opposed a proposal put forward by Olli Rehn, the EU Commissioner for Economic and Monetary Affairs; on 14 April he stated that the European Commission should supervise the Eurozone member states' budgets more closely. Germans fear that this procedure, which is intended to prevent excessive public debt, would enable the European Commission to interfere with the Bundestag's competences, and thus encroach on a major element of national sovereignty. Rehn has suggested that budget bills should be presented to the European Commission and be discussed within the Euro Group before being submitted to national parliaments. In this way, he believes, instances of Eurozone member states exceeding the permissible budget deficits and public debt limits could be prevented. Rehn referred to article 136 of the Treaty of Lisbon, which enables the greater coordination of individual EU member states' economic policies. In response to that, Jörg Asmussen, secretary of state at the German Ministry of Finance, emphasised that the national budget procedure could not be violated. Many German politicians see Rehn's proposal as violating the German constitution. Nevertheless, Germany invariably demands that the imposition of stricter sanctions should be made possible in the case of countries which violate the Stability and Growth Pact, and wants to broaden the Eurostat's powers regarding the supervision of data on the budget deficits of all Eurozone member states.

121. Fitch, S&P await details of Fidesz's reforms that could affect Hungary rating Equilor April 28, 2010

Economists at Fitch Ratings and S&P commented on the results of the second round of the general elections saying that it is a good opportunity for the country, but the rating agencies expect the new government to provide the public with more details of its policy in the upcoming weeks, such as the details about the renegotiation of the IMF-led financial support package. "Fidesz has an opportunity to form a strong government and pass legislation to change the constitution and implement wide- ranging reforms to public expenditure and revenues (both relatively high in Hungary), necessary to enhance the growth outlook and sustainability of the public finances - said Fitch Ratings on Monday. "Should the government choose to implement such potentially unpopular reforms, such as reforming the municipality system and reducing the overprovisioning of public services, we believe this would eventually contribute to strengthening Hungary's public finances, and could support rating improvements over the medium term" - added Standard & Poor's Rating Services in a bulletin yesterday. Both agencies responded to the results that the overwhelming legislative majority which Fidesz gained would have no immediate impact on the creditworthiness of the country, but in the medium turn there is a possibility of an upgrade in correspondence with the revealed details of the reforms. Hungary's local currency long-term rating is 'Baa1' at Moody's, 'BBB-' at S&P and 'BBB+' at Fitch.

122. Hungarian central bank decided to cut rates by another 25bp Danske April 27, 2010

Hungarian central bank decided to cut rates by another 25bp bringing the key policy rate down to 5.25%, which was completely in line with expectations. In the statement following the decision, the MPC discussed the usual topics, such as further monetary easing being possible if risk assessment allows. Furthermore, the MNB Governor, Andras Simor, said that both options of a 25bp and 50bp rate reduction were discussed but that a 25bp rate cut received a convincing majority. Looking ahead, if the market conditions remain favourable the Hungarian central bank will likely continue in monetary easing going forward.

123. Hungarians give Fidesz a clear mandate... to do what? bne April 27, 2010

Zsolt Sandor Nagy was in a positive, if thoughtful, mood on Sunday, April 25. Fidesz, the centre-right Hungarian opposition had just swept to power, gaining a stunning 68% majority in parliament and demolishing the outgoing Socialists - a poor second with just 15% - in the process. Nagy, a taxi driver of 12 years, voted for Fidesz in the first round, but switched to the green LMP, which got 4%, in the second.

"I am a bit fearful about giving so much power to one party. But now they [Fidesz] are in, they have a clear mandate. It'll make a change from the last few years, when they [the Socialist government and opposition] were just arguing and getting nowhere," he said.

Gordon Bajnai, the outgoing prime minister, would no doubt argue that the Hungarian economy, after a decline of 6.3% last year, is now stable and coming out of recession, and that the average worker - like Nagy - is better off after tax changes this year. But that is not the commonly held perception. Viktor Orban, the Fidesz leader, and his party machine hammered the Socialists over economic policy at every opportunity, dismissing Socialist claims of stability to point at rising unemployment and general economic and security fears.

Fine words

Orban, a former law student and political activist in the last years of "soft" communism in the 1980s, won Magyar hearts and minds with promises to strengthen law and order, boost the economy by creating jobs, and both simplify and cut taxation. Such words are fine for the masses, but have more sober-minded economists questioning the maths, especially after Fidesz has up to now routinely denounced the budget deficit prediction (of 3.8% of GDP) as a lie. This is all the more important given that Hungary has been under International Monetary Fund scrutiny since securing a €20bn stand-by loan 18 months ago to help it through its troubles.

Orban himself has spoken only in general about its economic policy, saying details can only be determined "when we know the true state of economic affairs." The markets, however, cautiously welcomed the Fidesz victory, and observers believe Fidesz will come to an accommodation with the IMF that will allow some increase to the deficit without upsetting the markets.

Zoltan Arokszallasi, economic analyst with Erste Bank in Budapest, says: "We think that without any change in the current developments, the budget deficit would be 4.2% this year. We believe that [a Fidesz government] would only increase the deficit target in accordance with the IMF, and that should be accompanied by structural reforms. In our view, the latter scenario could have a positive effect on the growth potential of the economy, even if this is accompanied by accepting a somewhat larger deficit this year."

But Orban's emphatic victory - securing more than two-thirds of the parliamentary seats - means that he can push through much more than mere economic and social legislation. "With this majority he can change the constitution, change the electoral system, re-write the media law and appoint officials, such as the supreme court judges, without consultation [as previously]. I don't think he will, but he could even create a kingdom," says Peter Kreko, director of research at Political Capital, a Budapest think-tank.

Indeed, Fidesz has already said that it will halve the number of MPs (Hungary is currently endowed with 386, the same number as for the old pre-WWI state) and similarly cut the bloated municipal councils. Such streamlining would reduce the state payroll, a plus for the economy - but what of Orban's economic record and support for business?

As prime minister in the centre-right coalition from 1998-2002, Orban initially kept a tight budget and made cautious reforms, including a simplification of the taxation and social security systems. From 2000, however, he implemented a housing subsidy programme that, though highly popular with the middle classes (it's main beneficiaries), later proved costly to the budget. He also upset a string of foreign investors, particularly in the energy sector, by meddling in previously agreed pricing contracts.

Memories of these distant events were revived last October when the Fidesz-led city of Pecs forcibly acquired the operator of the local water works, in which GDF Suez, the French utility, had management rights until 2020. The move was later deemed lawful by a local court - but foreign investors nonetheless took note.

Whatever, with its huge majority, the new government will have no hiding place if things go awry, Kreko notes. "It's a danger for them; they will have no scapegoats, except the outgoing Socialists and perhaps the IMF or euro adoption schemes," he says.

From his driver's seat, Nagy in his taxi agrees. "They are in a position to do something, whether it's for the better or worse. It's up to them; they have no excuses now," he says.

124. Hungary after the elections The Vienna Institute for International Economic Studies April 26, 2010

The right-wing Fidesz party and its leader Viktor Orbán achieved a landslide victory in the April legislative elections. Fidesz will be able to form the next government alone, without any coalition partner. Should it get a two-thirds majority of parliamentary seats next Sunday, it will be in a position to change any law, including the constitution. What will be the consequences for the Hungarian economy?

The 2010 election campaign had an interesting feature: given the incontestable lead in opinion polls, Fidesz campaigned without announcing a detailed economic programme. Apparently this creates nearly unlimited scope for the new government to do anything without being later confronted with pre-election promises. However, the memory of the electorate might be not as short as assumed by the winning party. Over the past eight years in opposition, Fidesz was a fervent opponent of all government-initiated reforms that aimed at attaining a sustainable fiscal stance in the medium and long run. It viciously attacked both the Gyurcsány government's short-run fiscal stabilization measures starting from mid-2006 and the crisis management since the autumn of 2008. It does not acknowledge the Bajnai government's success in saving Hungary from financial disaster either. All in all, Fidesz's current popularity, manifested in the party's landslide election victory, is to a considerable extent based on illusionary expectations of the party's supporters concerning a painless way out of Hungary's current situation.

The first and foremost concern of the new government will be the budget for the current year. The outgoing government's budget law reckons with a 3.8% deficit relative to GDP, a target approved by the IMF. This target, however, cannot be reached without further ad hoc expenditure cuts since the ailing state railways and the Budapest public transport company as well as some hospitals and local governments will need a bailout. A decision of the Constitutional Court abolished the recently introduced tax on real estate, leaving a gap in the projected revenues. All that means that the new government should start its tenure either with expenditure cuts in order to observe the official deficit target or with the decision to drop the previous government's deficit target. Most probably the new government will choose the second option. A somewhat higher deficit target (about 5% relative to the GDP) than originally projected may possibly be agreed upon with the IMF and the European Commission. This would match the prevailing general pattern of budget deficits in Central Europe.

But will this limited increase in room for manoeuvre be sufficient to open a new chapter in Hungary's history as Fidesz promises? The pillars of Fidesz's ideas on the economy - facilitating economic growth through radical tax cuts on the one hand without touching fiscal expenditures (known plans for diminishing government outlays focus predominantly on reducing bureaucracy) on the other - seem to be an equation without any known formula for solution if the budget deficit is to remain under control. In the current international environment and Hungarian circumstances, however, the most likely scenario for post-election economic policy in Hungary is one that foresees a willy-nilly continuation of fiscal stability-oriented policies in accordance with the existing IMF stand-by agreement (possibly renegotiated in some details). Continuing the stability-oriented economic policy may be persuasive for external observers but less so for the voters of Fidesz (52.5% of the electorate) waiting for rapid improvements in the country's economic performance and the population's standard of living. With prudent economic policy the current winner Fidesz may easily fall hostage to its own past rhetoric, exposing itself to the demagogy of the extreme right-wing 'Jobbik' party (along the track beaten by Fidesz in the past eight years). Prudent economic policy thus bears the risk of defeat in the next elections, the absence of it would, however, mean a prolongation of the country's current economic and social crisis.

125. Hungary cuts interest rates again as Fidesz secures two-thirds majority bne April 27, 2010

Capital Economics says the markets' favourable reaction to Fidesz's landslide election victory in Hungary will have been a key factor behind today's decision by the National Bank to cut interest rates by 25bps to 5.25%. Assuming that Fidesz can keep the markets' confidence, we expect that further rate cuts are on the cards. More importantly, however, we still think that rate hikes remain a distant proposition.

126. Hungary Fidesz calls again for central bank chief to resign Danske April 28, 2010

Yesterday, Fidesz, the winner of the Hungarian general election, called again for resignation of the central bank governor, Andras Simor. The clear risk is whether Hungary's next Prime Minister will try to endanger the central bank independency.

127. Hungary is changing UniCredit April 27, 2010

Where does the victory of Fidesz in Hungary leave us? Regarding the economy, Viktor Orban's right-wing party intends to lighten the tax burden and thereby relax the austere policies which characterised the final years of the outgoing Socialist administration, especially that of current Prime Minister, Gordon Bajnai.

"Without consistent tax cuts, economic growth is not going to take off", said Orban. The party's chief economist Gyorgy Matolcsy, however, later explained that the tax cut, in 2010, will probably no longer be carried out; in its stead the current idea is to initiate a three-year plan starting in 2011. Contextually speaking, the government needs to cut public spending which currently stands at around 50% of GDP.

To reach this objective, Fidesz is planning to enlarge the margin between deficit and GDP from its current 3.8% to 5.5% by the end of 2010. This policy may yet be accepted by the markets if Hungary is able to renegotiate the strict terms of its agreement with the International Monetary Fund - the main lender in a 2008 anti- crisis loan of 20 billion Euros - and if it is able to usher in a series of radical reforms.

Hungary this year seems destined to be left standing growth-wise. According to the country's main economics institute, the GKI, in 2010 GDP will not see any movement and this comes after a 2009 which saw it plunge by 6.2%. Hungary's lamentable unemployment rate tells a similar story: in February the figure stood at 11.4%, equalling 660 thousand unemployed; double the figure of 2006. Regarding the employment rate, at 56%, Budapest has the second-worst performance in the entire European Union. Fidesz, for its part, has promised the creation of a million new work places over the next ten years.

Hardly the most encouraging of performances then, which clashes with the international praise lauded on the one-party Socialist government for its rigorous fiscal policy which stopped the country sliding into default during the height of the recent worldwide financial crisis. From this point of view, Hungary is an exhausted country which is ready to give the boot to a government and Socialist party whose consensus was eroded by the same austere fiscal policies they were forced to implement.

In the background to this story looms Hungary's entrance in to the Eurozone. The rise of Fidesz seems to reduce the prospective for the country adopting the Euro in 2014 as the Bajnai government had planned. The exiting Premier, who has always been seen as a policy wonk, implored the country to not miss the train for the single currency. "We need the Euro as soon as possible," he declared before the elections. Who is Viktor Orban?

The boy who, on June 16, 1989, on the day posthumous funerals were held for Imre Nagy and the other martyrs of the 1956 democratic revolution, leaped on to the stage and demanded democratic elections from a dying communist regime has grown up and is now preparing to become Prime Minister of Hungary for the second time. Viktor Orban, in fact, seems destined to take on the role of head of government due to his being leader of the Fidesz party.

Orban was PM between 1998 and 2002, during Hungary's last experience of right- wing governance. To succeed him was Socialist Peter Medgyessy. The former child prodigy of Magyar politics has succeeded, in short, in surviving the wilderness of the last eight years in opposition, and even the unexpected blow during parliamentary elections five years ago when the victory of Fidesz was all but guaranteed and instead Ferenc Gyurcsany and the Socialists won through.

The leader of the conservative party was born on May 31, 1963 in Szekesfehervar. He graduated in law in Budapest. In 1989, two years after his graduation, he was awarded a scholarship from the Soros Foundation which allowed him to spend six months at Oxford University, an experience which was the turning point in his academic and political career. He is married to legal professional Aniko Levai, he is a protestant and, regarding sport, he plays football.

In 1988 he was among the founding members of Fidesz, an acronym signifying Alliance of Young Democrats. In 1989, he shot to international fame for his speech in front of the coffin during the symbolic second funeral of Nagy, the leader of the 1956 revolution and who was hung by the Soviets. In 1994, Orban was a central figure in Fidesz's transformation from a liberal party, which it had been for some time, to a right-wing one. The future Hungarian PM was also Vice President of the Popular European Party (PPE).

128. Hungary's unemployment rate jumped to 11.8% in Q1 Equilor April 29, 2010

The Hungarian unemployment rate unexpectedly increased sharply to a record high in the first quarter of the year, 11.8% of the workforce was out of work, up from the 11.4% in the previous three months - the Central Statistics Office said today. Analysts say that the rise in the January-March period was almost as dramatic as in the previous months. At the moment there is not much information about why the tick up took place - they added. The positive reading of the statistics is that those who become unemployed do not fall into the inactive sphere of the population, thus the activity rate in Hungary moved higher over the past year. There were 3.72 million people employed in the first quarter in the population aged 15-74, about 45,000 less than in the same period 2009. The number of those economically inactivate, totalled 3.47 million, 60,000 lower than a year ago.

129. Hungary: CB cut the base rate by 25bp, to 5.25% Erste April 27, 2010

CB cut base rate by 25 basis points to 5.25%, as expected

As expected, the Monetary Policy Council of the central bank cut the base rate today by 25 basis points to 5.25%. The Council's press release did not contain any significantly new elements compared to the March statement. The main points remained the following: (1) Growth could resume this year after the sharp downturn in 2009. (2) Inflation could start to drop towards the mid-term target from the middle of this year and then dip below it in 2011. (3) Uncertainties around the persistence of the improving international sentiment remain, due to the doubts on the sustainability of government debt in some Euro Area countries. (4) The external vulnerability of Hungary has decreased, but high debts and weak economic growth indicators continue to pose a risk. At the press conference, Governor Simor said that the Council discussed two options: a 25 basis point and a 50 basis point cut of the base rate. The 25 basis point reduction was supported by a 'convincing majority', according to the governor. He also expressed that the MPC sees future growth prospects as somewhat better than previously anticipated according to first quarter economic data. Inflation is also 'slightly better' compared to previous expectations according to first quarter data, Simor added. He also emphasized that a stronger forint would mean tighter monetary conditions, and that the MPC would not rule out FX market intervention (however, its main tool is the interest rate).

Assessment: The communication of the central bank remained basically unchanged compared to the previous month, so the only thing indicating that the MPC may be getting somewhat more cautious on rate cuts is the increase in the number of members voting for the more hawkish 25 basis point cut. After the comment of Mr. Karvalits more than a week ago, Mr. Simor reiterated that further strengthening of the forint would tighten monetary conditions, stating that the central bank would not be happy with further forint appreciation. In the statement, we do not see clear signs of a preparation of markets to an ending of the rate cutting cycle. However, uncertainties around future fiscal policy may also remain a concern for the MPC in its rate setting decisions. For now, we continue to expect a further rate cut to 5% by the start of the summer, which we now see as justified, given current international sentiment and the inflation outlook in Hungary.

130. Latvia's PM says country to return to growth in H2 bne April 30, 2010

Latvia's economy will return to growth in the second half of this year, and the country remains on track to join the euro zone in 2014, the country's Prime Minister Valdis Dombrovskis said in an interview with Dow Jones Newswires.

Latvia has been badly hit by the financial crisis as capital quickly exited the country. Latvia's gross domestic product contracted by 18% in 2009, and the economy is expected to shrink again in 2010. "This year's budget was based on forecasts of a 4% contraction. But latest forecasts from the Ministry of Economics indicate that the economy may perform somewhat better, so we may see a 3% contraction," Dombrovskis said.

"[But] the economy is improving, and we expect a return to growth in the second half of this year," he added.

The country is on track to conform with the rules of the Maastricht Treaty and adopt the euro in 2014, said Dombrovskis, who previously served as Latvia's finance minister.

"Commitment to join the euro is still there, and the target date remains the same-- Jan. 1, 2014--which means that we have to meet Maastricht in 2012. And that's exactly what we are planning to do."

Dombrovskis said the fallout from Greece's debt crisis on Latvia has been very limited. "Only in recent days, as financial markets are getting really nervous about Greece, we have seen some spillover effects on Latvia--our credit default swap spreads have started to grow."

Dombrovskis dismissed speculation about a devaluation of the lat currency, noting that the country has gone through immense pain to restructure and cut spending. "Financial markets are very calm about the lat, and we do not see any signs of trouble about the lat now," he said.

131. Lithuania Q1 GDP came out better than expected, but recovery fragile Danske April 29, 2010

Lithuanian Statistics published the flash estimate of Q1 10 GDP growth. The decline in GDP slowed significantly at -2.9% y/y compared with -12.1% y/y in Q4 09. The outcome was significantly better than the consensus forecast (-4.5% y/y) and our estimate of a 6.0% y/y drop. Quarter- on-quarter seasonally adjusted GDP growth turned into negative territory again at -4.1% q/q, down from 1.3% y/y in Q4 09. This was broadly expected. The rise in energy prices at the beginning of the year due to the coldest winter for many years has affected first quarter GDP results. Assessment and outlook Today's GDP figures are likely to create more optimism regarding the outlook for the whole year. But it is still too early to say that all the challenges of the Lithuanian economy are over. As was broadly expected, the improvement was due to a recovery in export-related activities while domestic demand dependent activities (construction) continue to fall. The most recent industrial production and export indicators show that Lithuanian export leaders are resistant to adverse shocks and are able to recover, together with their partners in Europe and Russia. We are still more pessimistic in our forecasts on GDP than the Ministry of Finance and the central bank. However, on the key issues of economic outlook this year, there are no major differences. The general opinion is that this year's Lithuanian GDP should be significantly better than 2009, but whether we will have a positive growth rate is still not clear. Unemployment is expected to pick up this year and the only factor able to reduce the unemployment rate is emigration. Adverse labour market outcome would result in a rather weak domestic demand outlook as well. In official estimates, the positive upside is mostly based on the acceleration of the EU structural fund absorption. That would lead to a significant rise in investments and, as a consequence, GDP. Indeed, some of the expected public investment project (energy, infrastructure) might speed up the recovery of total investment, but limited upside in the banks' credit recovery could counter this. We still believe that the uncertainties regarding the more optimistic growth scenario this year remain relatively high. It is still unclear what impact the closure of the Ignalina nuclear power plant will have on the economy and uncertainties persist concerning the size of the shadow economy. In general, we predict a more robust recovery for H2, which should shift to a positive trend in 2011.

132. Think-tank estimates Poland Q1 GDP Growth at 3.5% bne April 29, 2010

According to the estimates of the Gdansk Institute for Market Economics (IBnGR), in Q1 the Polish economy grew 3.5 percent year-on-year and 0.9 percent quarter-on- quarter, Polish News Bulletin reported. Its experts believe that this growth was propelled mainly by high consumption, which they expect to have grown 2.5 percent in the first three months of the year. The increase in individual consumption was even higher and amounted to 3.3 percent. According to IBnGR analysts this fact indicates that consumers have regained trust in the Polish economy after the crisis. They also present their estimates concerning investment expenditure growth, which in their opinion rose 3.2 percent in Q1. They underline that this growth is all the more impressive given the unfavourable weather condition during the winter months. The institute's experts also expect exports and imports to have risen 5.6 and 2.2 percent, respectively, with average inflation in Q1 settling at 3 percent.

133. Poland gas firm PGNiG might up planned eurobond issue above EUR500m bne April 30, 2010

The value of the planned Eurobond issue programme of blue-chip natural gas producer PGNiG might exceed EUR 500mn, the firm's deputy head Slawomir Hinc has said, IntelliNews reported. He added that the issue would take place in Q4/2010 or in Q1/2011. Its proceeds will be earmarked for financing part of the PLN 5bn (EUR 1.1bn) investment scheme. Hinc added that the final value of eurobonds' issue would depend on the firm's Q3/2010 results and the fate of its current motion for (10%) gas tariff increase for households. PGNiG also plans to issue bonds worth of around PLN 3.0bn earmarked for Polish banks in H1/2010 and wants to use the proceeds mainly to pay back its current credit line.

134. Poland moves to settle dispute over the central bank's profit Erste April 26, 2010

The dispute over the central bank's profit that started between the government and the central bank's management during the term of the deceased Governor Skrzypek (and created tension within the monetary policy council as well) will likely be settled this week. MPC member Elzbieta Chojna-Duch announced that the MPC and the CB's management will look for a compromise and that the council will deal with the issue at its upcoming meeting next week, so that the deadline for submitting the central bank's financial report for 2009 can be met. The council has already agreed to move the implementation of the resolution on the creation of FX reserves forward by one year. Retrospective applicability was one of the problematic issues, as the newly introduced methodology would leave more of the CB's 2009 profits to be transferred to the state budget (and less in the FX reserves). The settlement of this issue will be positive, as it will reassure the markets that the central bank is indeed functioning without disturbance after the tragedy in Smolensk. The next MPC meeting will also be a rate setting meeting. Even though the rhetoric of the central bankers has become more dovish recently, in light of the weak retail sales and construction data in Jan-Feb, we expect the rates to remain flat in April (key rate at 3.5%). Our view on the zloty remains the only factor that could yet induce another cut - if it appreciates too quickly, the central bank will certainly act. If verbal or market intervention does not help, the council might deliver a 'temporary' rate cut to slow the zloty down. Otherwise, in our baseline scenario, we expect the first hike to be delivered in 3Q, as the second half of this year should already bring about a gradual recovery of inflationary pressures in the economy. The latest data supports this outlook. Poland's March sold industrial output showed y/y growth of 12.3%, beating the market estimate of 10.4% and our 11.8% forecast. In February, industrial output grew by 9.2% y/y. In m/m terms, Polish industry added 18.9% in March, compared to 3.1% in February. The seasonal effect was a positive factor in March - after adjusting for seasonality, industrial output grew by 9.6% y/y and by 2.3% m/m. Even though the y/y result was positively affected by a base effect, the recent data confirms the continued - albeit slow and occasionally hesitant - recovery of the Polish industrial sector. In NSA terms, the manufacturing sector showed an impressive improvement, adding 13.6% m/m and 21% y/y; the mining sector grew by 20% m/m and 8.1% y/y; utilities grew by 0.1% m/m and 0.6% y/y. Compared to February 2009, an increase in sold production was reported by 29 (22 in February) out of 34 divisions. These include, for example, manufacturing of computers (+41.9%), electrical equipment (+33.3%) and motor vehicles (+17.4%). Some divisions contracted; these include, for example, the manufacture of beverages (- 17.8%), other manufacture of furniture (-8.6%) and machinery and equipment (- 3%). In NSA terms, the construction sector showed a substantial improvement compared to February 2010 - production increased by 36.2% m/m, but remains weak y/y, contracting by 10.8% (February: - 24.6% y/y and +4.3% m/m). After adjusting for seasonal effects, the sector grew by 3.6% m/m, which corresponds to a contraction of 9.4% y/y, which shows a slow pickup after the rough winter crushed construction early this year. PPI was also stronger than expected in March. In monthly terms, they remained stable, resulting in a y/y drop of 2.4% (February: - 2.4% y/y and - 0.1% m/m). We expected -2.9% y/y; the market expected -2.7% y/y. The data confirms the continued gradual recovery of the Polish industrial sector, which has shown its viability even without support from the German scrap subsidy. In the coming months, the y/y figures will be stronger, thanks to the base effect. Apart from that, we expect the industrial sector to be supported by a continued revival on exporting markets. After two months of disappointments, Polish retail sales beat expectations in March, adding 8.7% in y/y terms (+21.9% m/m; in February: +0.1% y/y). We expected +5.3%; the market was less optimistic, anticipating +4.3% y/y. The correction is partly attributable to a positive workingday effect, but it also confirms a rebound after the cold first two months of the year. We expect retail sales to continue growing at a moderate pace in the coming months, as domestic demand will remain suppressed by the rigid labor market. The m/m improvement is visible for all components. Furniture and cars, which were responsible for Jan-Feb slumps, grew the most in March, by 50% and 30.7% m/m, respectively. Clothes added 24.8%, food 24.5% and fuels 15.2%. In y/y terms, sales of pharmaceuticals and cosmetics grew the most, by 22.4%; fuels added 18.4%, clothes 16.8%, furniture and appliances 17.2%, food 7.1% and cars 3.8%. Poland's unemployment rate was also positive, easing from 13.0% to 12.9% in March, which was in line with expectations. In the coming months, we expect the unemployment rate to continue to grow, as it typically lags in reflecting the impact of the crisis. We expect it to peak early in the second half of this next year at some 13.5%.

135. Poland NBP maintains neutral bias, rhetoric remains dovish Erste April 29, 2010

In line with the market expectations, the MPC kept the rates unchanged; reference rate is at 3,5%, the lombard rate at 5.0%, the deposit rate at 2.0%, and the rediscount rate at 3.75% on an annual basis.

The statement maintains neutral bias of the monetary policy (probabilities of inflation running below or above the target are viewed as balanced) and acknowledges that macroeconomic data point to continuing economic recovery. The near-term inflation outlook remains disinflationary, but MPC member Glapinski suggests at the press conference that anti-inflationary pressures might prevail in the economy for longer time than previously anticipated, possibly until the end of 2010. Dovish statements are consistent with the recent (anti-)zloty interventions.

The acting president Wiesiolek confirmed at the press conference that NBP will continue with FX interventions as long as they find it necessary. NBP intervened on the market after the zloty exchange rate approached 3.83 per Euro, saying that the intervention is not against the current value but rather against the zloty's momentum. Today's statement confirms that the central bank will also keep an eye on the zloty in the future to ensure that it does not cause too much trouble to Polish exporters.

The central bank also approved its 2009 financial report as it was proposed by the NBP§s board, ending a row between the council and the management. This means that about PLN 4.2bn will be transferred to the state budget.

Overall, the statement suggests lower probability of a rate hike and possibly slower pace of appreciation of the zloty (which will be now held back not only by the market sentiment but also by the central bank) then we previously expected. We do not, however, change our baseline scenario (1st hike in late 3Q, zloty at 3.65 in December) but rather assign slightly higher probability to its alternatives.

136. Poland rate council seen holding rates at 3.5% through at least end-Q2 bne April 28, 2010

The Polish Monetary Policy Council is expected to hold basic interest rates flat to at least the end of the second quarter, keeping the reference rate intact at 3.50%, according to the majority view of banking analysts surveyed by PAP.

Seventeen out of 18 surveyed analysts expect no-move to end-H1, while one analyst anticipates a 25 bps rise by June.

137. Polish central bank decided to keep the key policy rate unchanged Danske April 29, 2010

As expected, the Polish central bank decided to keep the key policy rate unchanged at 3.50% at its MPC meeting yesterday. The statement following the rate announcement was overall very neutral regarding the uncertainty over the Greek crisis. The NBP Acting Governor, Piotr Wiesiolek, called for the appointment of the new NBP governor without necessary delay.

138. Polish retail sales in March surprised on the upside Danske April 26, 2010

On Friday, Polish retail sales in March surprised on the upside rising to 8.7% y/y, up from 0.1% y/y in February. Such strong retail sales numbers are very positive albeit a bit puzzling given the still relatively subdued developments in real wage growth. That said, the numbers confirm a quite broad-based recovery in the Polish economy with the Polish consumer still in a very good mood and Polish industry doing quite well. _ Polish unemployment improved moderately in March decreasing to 12.9%, down from 13.0% in February.

139. Slovakia industrial PPI drops by 6.1% y/y in March bne April 29, 2010

Slovak PPI for the industry fell by 6.1% y/y in March, compared to a 7.4% y/y decline for the previous month, the statistics office (SUSR) reported, IntelliNews reported. In general, however, the PPI dynamics remains relatively stable for the past six months, suggesting that the effect of the economic crisis on commodity prices has been more permanent. The highest drop of costs for the month was registered in the power utilities sector of 11.2% y/y, while costs in the mining sector were also down by a sharp rate of 9.2% y/y. On the other hand, manufacturing producer prices fell at a more moderate pace of 2% y/y for the month and were stable since the beginning of the year as well. There were no major changes in the structure of the PPI dynamics in March apart from a noticeable acceleration of the growth of costs in the refined petroleum branch. They were up by 37.4% y/y for the month on the back of a low comparison base effect as well as a recent upward pressure on the international oil prices. The impact of the higher refined petroleum producer prices was partially compensated by smaller, practically negligible, changes in a downward direction in costs for transport equipment and electronics production. At the same time, the PPI for export was up by 0.5% y/y in March, possibly due to the depreciation of the euro exchange rate since the beginning of the year. An upward trend was also observed in the agricultural PPI, which still dropped by 4.1% y/y for the month. At this stage, there does not seem to be any filtering of higher agricultural costs to higher PPI in the food production branch, suggesting that a potential boost to consumer prices cannot be expected in the short term as yet.

140. Slovakia Sells EUR205.5M Feb 2016 Bond, Average Yield 3.3444% bne April 27, 2010

The Slovak Debt And Liquidity Management Agency said it sold EUR205.5 million of a six-year government bond at an auction Monday.

The series on offer is a reopening of an issue launched February.

The following are the results of the auction. Amounts are in euros. Figures in brackets are data from the previous auction.

Issue Six-year bond Maturity Feb. 24, 2016 Coupon 3.50% Amount on offer Open Bids received 428.5 mln Bids accepted 205.5 mln Bid-to-cover ratio 2.09 (2.05) Average yield 3.3444% (3.5843%) Average price 100.8039 (99.5522) Maximum yield 3.4005% (3.6036%) Minimum price 100.5100 (99.4500) Settlement date April 28, 2010

SE CREDIT 141. Budget deficit seen posing risk Bulgaria's ERM II entry bid this yr bne April 27, 2010

The excessive budget deficit Bulgaria reported for 2009 would most probably hinder the country's intentions to apply for entering the European Union's exchange-rate mechanism (ERM II) by the end of the year, analysts said, SeeNews reported.

Earlier this month, the government in Sofia said that Bulgaria's budget deficit last year reached 3.7% of gross domestic product (GDP) due to "hidden" procurement deals signed by the previous cabinet, exceeding the gap of 1.9% of GDP reported earlier. Official Eurostat data, released last Thursday, showed that Bulgaria's budget deficit reached 3.9% of GDP last year, exceeding both the previously announced figures and the Maastricht criteria on budget shortfall.

Prime Minister Boyko Borisov said that in this case the government will drop its plans to apply for ERM II membership this year, as it fails to meet the target of having budget deficit equivalent to or lower than 3.0% of GDP set by the Maastricht criteria, which an EU member country should meet to enter the Eurozone.

Under Article 104 of the Treaty establishing the European Community, EU member states are obliged to avoid excessive deficits in national budgets and the latest developments regarding Bulgaria's budget balance automatically triggered an excessive deficit procedure against the country last week.

As a first step, the European Commission will draw a report on Bulgaria's performance by May 12. The Council of Ministers is then expected to decide whether or not an excessive deficit exists and in if such a deficit exists, it should recommend to Bulgaria to put public finances under control within a certain timeframe.

Bulgarian Finance Minister Simeon Dyankov said the country may still start its application process for the ERM II this year, depending on whether EU authorities put the country under their scrutiny for an excessive deficit.

"At the moment that we have all the information, we will place a ERM II entry bid. Currently, this is becoming more difficult because of the situation in Greece and in the Eurzone as a whole. We, however, have the imporant task next month to see whether we could avoid an excessive deficit procedure. I assume the EC analysis will be ready in a month, after which we will make our decision," Dyankov told SeeNews on the sidelines of the Vienna Economic Talks meeting which took part in Sofia on Monday.

Analysts polled by SeeNews, however, were doubtful that the country will succeed to place its bid for entering the euro's waiting room this year against the backdrop of an excessive deficit procedure from the EU.

142. Bulgaria FinMin says planning to bring 2010 budget gap below 1.8%/GDP bne April 29, 2010

Bulgaria's government should try to bring budget deficit below 1.8% of the projected gross domestic product (GDP) this year to demonstrate fiscal stability, Finance Minister Simeon Dyankov said on Wednesday, SeeNews reported.

"The International Monetary Fund (IMF) has confirmed that the maximum deficit that Bulgaria can afford this year is 1.8% of GDP, which is some 2.5 billion levs ($ 1.6 billion/1.3 billion euro). This we is what we can afford for the whole year. My ambition is to go even lower to show that we really have a stable fiscal policy," Dyankov told national broadcaster Nova TV.

He added that preliminary data showed that the government has reached balanced budget in April for the first time this year.

Next month the European Council will decide whether to launch an excessive deficit procedure against Bulgaria, as official Eurostat data, released last week, showed that country's budget deficit reached 3.9% of GDP last year, exceeding the officially announced figure of 1.9%.

Earlier this month Dyankov said that revised data showed that Bulgaria ran a budget deficit of 3.7% of GDP last year due to "hidden" procurement deals signed by the prevoius government.

143. An IMF team will be in Bucharest between April 27 and May 7 Erste April 26, 2010

An IMF team will be in Bucharest between April 27 and May 7 for another review of the current stand-by arrangement. Soon after that, Romania could receive the next disbursement of EUR 0.85bn from the IMF. The budget deficit will be the top priority of these talks between the IMF and Romania. It seems that Romania managed to meet the budget deficit performance criteria for 1Q10 at the expense of building arrears. Budget revenues continued to fall, while expenditures remained on an upward trend at the beginning of 2010, due to the rigid structure of the social expenditures. Cutting the budget deficit to 5.9% of GDP in 2010 remains very difficult and we might have an increase of this official target agreed with the IMF, as well as some unpopular measures aimed at raising public revenues or cutting expenditures. This week, President Basescu had a meeting with the government to discuss the pressing issue of cutting the budget deficit in 2010. Basescu recently expressed his discontent about the insufficient number of layoffs in the public sector as compared to the private segment of the economy. An adviser to the prime minister said that 75,000 public employees could lose their jobs in 2010, from a total of 1.4mn people working for the government. We reiterate our view that increasing the taxation level during the recession should be avoided as much as possible. Looking at the experience of other countries, fiscal reforms based on cuts in unnecessary expenditures are more likely to produce sustainable effects than those based on tax increases. Any increase in the taxation level before the dawn of the economic recovery could extend the length and the intensity of the economic downturn. The Romanian economy would then be in danger of decoupling from the revival of major markets and could enter a long period of sluggish economic growth. As soon as the economy reaches its potential and the budget deficit stabilizes below 3% of GDP, higher taxes for specific areas could be considered, since Romania's needs for development are not consistent with maintaining the present level of taxation in the long run. Budget revenues are well below Eurozone standards and an improvement in the government's capacity to collect taxes from the existing fiscal system should be a top option at this moment. Prime Minister Emil Boc attended the Senate meeting dedicated to the discussion of the pension reform bill that must be approved by the end of June. Along with the implementation of the law regarding a unified and simplified pay scale in the government sector and the fiscal responsibility legislation, the new pension law is a key requirement of the current stand-by arrangement with the IMF. The law introduces a broader contribution base, a better control of fraudulent disability pension claims and increases the retirement age to 65 for both men and women by 2030. But the most difficult measure to be implemented, both from the political and social perspective, is a cut in high pensions. The government intends to recalculate 180,000 special pensions and to reduce those above RON 3,000 (the equivalent of EUR 730). Special pensions are not based on the contributiveness principle to the public social insurance system, and are instead derived from the last salary gain of that individual person before retirement. They usually represent 80% of the last salary gain and encouraged practices of artificially increasing incomes in the month prior to retirement by the inclusion of different bonuses. Former employees of courts, the army, the police, the Ministry of Foreign Affairs, members of Parliament and civil pilots are among those with special pensions. At present, the government is supported in the Parliament by the Democrat Liberal Party, the Democratic Union of Hungarians in Romania, ethnic minorities other than Hungarian and independent MPs. It has a narrow majority after the recent decisions of some members of the Social Democrat Party and Liberal Party to leave their parties and to support the ruling coalition. Nevertheless, the implementation of the new pension law as of January 2011 remains difficult, as the opposition and other bodies affected by these measures said that they will contest them at the Constitutional Court or even at international organizations. The potential failure of Romania's commitment to implement the fiscal reforms asked for by the IMF would cause a negative reaction on the markets. The high level of FX reserves would then allow the central bank to counter any significant depreciation pressure for some time, but the losses in terms of international credibility should not be overlooked. Apart from the reforms asked for by the IMF, the government has prepared a draft law for the revision of the Constitution. The key changes are a shift to a single-chamber Parliament and a cut in the number of MPs to a maximum of 300. The draft will be sent to the president and then will be debated in the Parliament. In a referendum held in November 2009, around 80% of the people said yes to these reforms, initiated at that time by President Basescu. The constitutional reform is aimed at streamlining the political decision making process, saving money in the public sector and increasing people's confidence in the Parliament, which has traditionally ranked low in this respect. This week, the Ministry of Finance sold 10Y bonds worth RON 700mn at an average yield of 7.02%. It was the first issue with a 10Y maturity since December 2007 and investors showed high interest, placing total bids of RON 1.8bn. This is part of the 2010 strategy of the Ministry of Finance to issue more long-term debt once the markets have settled down after the political and financial turmoil. The money market remains in a structural surplus of liquidity and short-term interest rates are considerably below the key rate. After reaching a three-month low of 4.16 at the beginning of this week, the RON strengthened to 4.13 on Wednesday, in line with other peer currencies. The depreciation pressures on the RON that were common one year ago have turned into appreciation pressures following the resumption of global capital flows to emerging markets. A permanent adjustment of the C/A deficit to less than 5% of GDP, as compared to double-digit values before the onset of the crisis, also works towards RON appreciation.

144. IMF, Romanian FinMin discuss government revenues collection bne April 28, 2010

Visiting International Monetary Fund (IMF) officials on Tuesday had a first round of talks at the Romanian Finance Ministry over the Romanian Government's Q1 revenues collection, Agerpres reported. Finance Minister Sebastian Vladescu said the Budget was implemented in the first quarter of the year within the levels of the nominal deficit target of RON 8.25 billion agreed upon with the IMF, but the revenues were smaller the initially projected. He added that enlarging the tax base will also be discussed with the IMF. Chairman of Romania's National Tax Administration Agency (ANAF) Sorin Blejnar said that at this first round of talks an analysis of the Government revenues collected by the ANAF in the first quarter of 2010 was conducted, along with the latest developments in the refunding of the Value-Added Tax (VAT) and the measures suggested to boost Government revenues. Blejnar said these measures include legislative measures, such as a legislative package considered by the Government to combat tax evasion, and organisational that regard the ANAF. He added that no tax increase or taxing large fortunes was discussed.

145. Romania - Negative outlook for Romania - likely to stay Mirzon April 27, 2010

Moody's Investors Service analysed the credit trends and outlooks for banking systems in 12 countries within the Commonwealth of Independent States (CIS), the Baltic States and Eastern Europe.

The report concludes that, in the near term, Moody's will likely maintain a negative outlook for most of these banking systems, a press release informs.__In its report, the rating agency points out that, for this year, it would likely maintain negative outlooks for banking systems in Ukraine, Kazakhstan, Hungary, Romania, Bulgaria and the Baltic countries, due to continued negative pressure on financial fundamentals and the still challenging economic environment in many of those countries.

Evidence of stabilisation have begun to emerge in a few countries however and the agency says that the outlook for the banking systems in Poland, Russia, Slovakia and Czech Republic could be changed to stable from negative in the second half of 2010. Moody's notes that changing the outlook on any of these banking systems to stable from negative will depend on sustainable improvements in the key credit drivers, including the country's macroeconomic environment, asset quality, revenue generation and funding conditions.

"In light of current uncertainties in the macroeconomic environment, negative credit trends are likely to persist this year for most European emerging markets banking systems," said Armen Dallakyan, a London-based Moody's Assistant Vice President- Analyst, and co-author of the report.

146. Romania budget deficit widens in Q1 but within IMF limits bne April 30, 2010

Romania's general government budget widened by 3.7% y/y nominally (and slightly shrunk in CPI deflated terms) to RON 8.2bn in Q1, but at 1.5% of the GDP officially projected for the full year's GDP it remained within the limits agreed with the IMF, IntelliNews reported. Revenues decreased by 1.4% y/y on the back of 11.5% lower VAT collections The higher excise duties (5.9% up y/y) and, surprisingly, profit tax collections (8.9% up y/y) offset part of the drop in VAT revenues prompted by lower consumption and economic activity, but finally the revenues to the budget remained significantly in the negative region as opposed to optimistic expectations for 7.5% rise in revenues from own economy (4.6% y/y including revenues from EU budget) sketched in the budget planning. On the public spending side, the expenses decreased by 0.5% y/y in Q1 due to massive (36.5% y/y) reduction of the capital spending largely believed to reflect government's arrears to the private sector. The public payroll indeed decreased by 8.7% y/y also - and this is rather surprising given the small decrease in the number of employees.

147. Romania's Business Sentiment Remains Mostly Positive in April bne April 29, 2010

Romanian managers in April remained mostly optimistic about the performance of the country's economy in the three months through May, the country's statistics board, INS, said on Wednesday, SeeNews reported.

Managers in the industrial sector expect increased output and a fall in the number of employees through June, as prices are expected to grow slightly, INS said in a statement on its website.

Managers of construction companies expect stable output and a fall in the number of employees, while the prices of construction works are expected to increase.

Sales in the retail sector are seen stablising and the number of employees in the sector are seen falling, whereas retail prices are expected to increase in the three months through June.

Managers in the services sector expect increased demand and stable prices through May but the number of employees is expected to decrease.

For its survey Romania's statistics board interviewed managers of 8,087 companies operating in the four sectors.

148. Romania's IMF arrangement seen failing in autumn bne April 27, 2010

A new IMF mission arrives today in Bucharest and until 7th of May it will assess Romania's fulfilment of criteria in the first quarter of the year, Ziarul Financiar writes. The next tranche, of 850 million euros, could most likely to be released in the second half of June. The arrangement with the IMF could fail in early autumn because the delayed economic rebound will make it even less likely that the Government will commit to unpopular cost cutting measures, say analysts, although the current assessment will end in the release of a new tranche. "We maintain our view that the fourth review, which is scheduled for IMF board discussion in mid-June, is likely to be completed successfully. Looking ahead, we believe that the potential problems regarding programme implementation are unlikely to emerge before September at the time of the fifth review," reads a report of American bank Citibank. The bleak growth prospects will make it politically less palatable for the government to stick to the target or take contingency measures if needed, Citi analysts say.

149. Romanian growth not seen surpassing 0.9-1.1% in 2010 bne April 28, 2010

This year Romania's economy will grow by 0.9-1.1 per cent at most, Florian Libocor, BRD chief economist, stated yesterday, pointing out that in the next two weeks the bank will modify its current prognosis that consists of a GDP growth of 1.5 per cent, Economic Daily reported.

"The growth of the Romanian GDP won't surpass 0.9-1.1 per cent in 2010. In the next two weeks we will revise our prognosis downwards from a GDP growth of 1.5 per cent. 2010 will see a fragile and tense recovery. We are entering the economic growth area; we've surpassed the crisis threshold that was generating psychological reactions in 2009. We can keep going," Lobocor stated, being quoted by Mediafax.

The chief economist of BRD continued by pointing out that he lacks arguments that would support the hypothesis of a W-shaped recession that would entail a new period of crisis. `Romania has the capacity and potential for growth but fails to put them to good use,' Libocor said. He added that he expects the inflation rate to drop to 3.8 per cent as pointed out in the bank's current prognosis.

The BRD analysts estimate an economic growth of 3 per cent and an inflation rate of 3.5 per cent in 2011. In other developments, the BRD shareholders have approved the issuance of dividends worth RON 195 M and the 2010 budget.

150. Foreign remittances to Serbia up 10% y/y to $5.5bn in 2009 bne April 29, 2010

Serbians working abroad sent home a total of USD 5.5bn in foreign remittances in 2009, diaspora minister Srdjan Sreckovic stated, adding that remittances went up by 10% y/y despite the global economic crisis, IntelliNews reported. Remittances accounted for more than 15% of the country's GDP, Sreckovic said, adding that the increase was not surprising as Serbians tend to send more money to their relatives in times of crisis and less in prosperous times. The largest foreign currency inflows to Serbia came from workers in Germany , Austria , Switzerland , the United States , Croatia and France , accounting for over 30% of the overall remittances. NBS vice- governor Bojan Markovic said the remittances are largely used for spending, mainly on imported goods and were thus augmenting the trade deficit. It would be better if they were channelled to investments or savings, Markovic said.

151. Tadic says Serbia ready for compromise solution over Kosovo bne April 26, 2010

Serbian President Boris Tadic stated that Serbia wants to find a solution for Kosovo, adding that the country is ready to negotiate in order to reach a compromise solution, Tanjug reported. Given the example of Cyprus, Serbia wants a solution for Kosovo, and not a frozen situation in which Kosovo will never become an UN member-state, because Serbia will never allow it, Tadi_ said in an interview for the Doha-based Al Jazeera. ,,We will continue leading policies towards reaching a compromise, however, the Kosovo-Metohija policies of defending our integrity and international law do not mean that we will stop from trying to become an EU member-state. Serbia will never give up on that, it is our main strategic goal," Tadi_ said. Serbia is ready to negotiate so as to reach a compromise solution and the compromise does not mean that Serbia loses everything and Kosovo Albanians get all. He said that Kosovo independence will never be recognized by countries like Spain, Romania, Slovakia, and Cyprus.

152. World Bank chief in Serbia says country needs new growth model bne April 30, 2010

Chief of the World Bank Office in Belgrade Simo Gray assessed that Serbia must move toward a new model of economic growth, based on investments, rather than consumption, Betanews reported. Gray stated for the May issue of the Belgrade monthly Bankar (ww.emg.rs) that the new growth model should include investments that stimulate export, and if possible, greenfield investments in new plants. According to him, an increase of economic growth in Serbia at a rate of two percent in 2010, three percent in 2011 and five percent in 2012 can happen only if the reform of regulations works, if the share of the private sector increases and if public administration is reduced. Asked about the consequences of delaying reform in the public sector, he said that the consequences in a crisis are somewhat more serious, since Serbia cannot rely on foreign capital sources which would finance its economic growth. "The slower the reforms, the lower the growth and the economy is less ready for the European market," Gray said. According to him, the aims set in Lisbon in 2000 for Europe, part of which Serbia would like to become, specify that 70 percent of the population aged between 15 and 65 should be employed. "This population group in Serbia has only 50 percent of employed persons, which is 2.5 million people. If you strive to reach that level, another 900,000 people need to be employed," he said, stressing that those vacancies cannot be created in the public, but in the private sector.

153. Serbia govt to cut spending by 0.75% of GDP per yr until 2015 bne April 28, 2010

Serbia plans to cut public spending by the equivalent of 0.75% of the projected gross domestic product (GDP) in each of the next five years, the Finance Ministry said on Tuesday, SeeNews reported.

The goal is to have a balanced budget by 2015, Finance Minister Diana Dragutinovic said in a statement. Public sector expenditures account for some 42% of Serbia's current GDP.

The planned cuts in public spending will be part of regulation on fiscal responsibility which should speed up Serbia's recovery from the global economic crisis, Dragutinovic said, adding that the first draft of the regulation will be sent to the International Monetary Fund (IMF) for screening.

Under the future regulation, Serbia's public debt cannot exceed 40% of the projected GDP for the year and that its annual debt limit cannot exceed 2.5% of the projected GDP, Dragutinovic said.

Serbia's budget deficit is projected at 4.0% of the GDP, or 107 billion dinars ($1.43 billion/1.07 billion euro), in the current year. The 2010 budget bill was drafted in accordance with the country's two-year, 3.0 billion euro loan deal with the IMF which expires in the spring of 2011.

154. Serbia's central bank sees dinar strengthening as depreciation pressure subsides bne April 30, 2010

Serbia's central bank said the local currency, the dinar, is likely to strengthen as the depreciation pressure subsided in the past months, local media reported on Thursday, SeeNews reported.

"It turned out that, just as the central bank has said, January and February's pressure on the dinar to depreciate was seasonal in nature," EMportal (www.emportal.rs) quoted the central bank's vice governor, Bojan Markovic, as saying. "As the winter season passed, the pressure came to an end and, as of March, the currency has been stable," he added.

The central bank, NBS, will not influence the movement of the currency in the coming period, Markovic said. Incumbent governor Radovan Jelasic has said NBS will not use Serbia's reserves to strengthen the dinar.

The dinar has lost about 4.0% of its value since the beginning of the year after shedding about 6.0% in 2009, according to NBS data.

155. Serbia's Jan-Feb C/A deficit shrinks 22.4% on yr bne April 28, 2010

Serbia's current account deficit narrowed to 447.8 million euro ($597.9 million) in the first two months of the year from 577.1 million euro a year earlier, preliminary central bank data showed on Tuesday.

156. Serbian government to cut income tax by 10% in fall bne April 27, 2010

Serbia Economy minister Mladjan Dinkic announced that the government plans to cut personal income tax by 10% and increase the non-taxable monthly income as of this fall in order to make the country more luring investment destination, IntelliNews reported. The government wants to attract large foreign investors and thus boost the country's exports, Dinkic said. Cutting the income tax is part of the broader tax system reform that the authorities are planning for next year. The announced tax reform seeks to boost production and employment, as well as exports, finance minister Diana Dragutinovic had explained earlier in the month. She also said the reform aims to improve country's competitiveness and reduce grey economy.

157. Turkey Central Bank continues to apply the exit strategy Fortis April 26, 2010

Central Bank continues to apply the exit strategy... On Thursday, at home Central Bank's second expectation survey has been released. Survey forecast for 12 months CPI was decreased by 3 bps to 7.22% while 24 months forecast increased by 6 bps to 6.93%. The released survey does not include any substantial alterations however high inflation expectations will definitely continue to concern the Central Bank. At abroad, Eurozone April services and manufacturing flash PMI data were announced to be 55.5 and 57.5 respectively which were slightly higher than the expectations for 54.3 and 56.8. Besides in the US, March core PPI figure was declared to be 0.1% which was in line with the expectations. Furthermore, PPI figure released to increase by 0.7% which was slightly higher than the expected 0.4% increase. In the US again, jobless claims data was announced slightly higher than the forecast of 455K, as 456K. Lastly, existing home sales figure was announced to be 5.35 mn (market forecast 5.28 mn).

On Friday in Germany March IFO index released as 101.6 which was higher than the market forecast of 98.6. Besides, in the US, February durable orders data, excluding transport, was released to increase by 2.8% which was higher than the market forecast of 0.7%. Today, at home Central Bank announced to increase required reserve ratio on foreign currency deposits to 9.5% from 9.0%. In December 2008, Central Bank decreased the required reserves by 2 points and injected $2.5 bln liquidity to the market. Asian markets closed higher and European markets are also expected to edge higher on positive hopes over Greece issue. ISE also expected to open in green territories, firstly pricing the Friday's developments and tracking European markets. The $/TRY and EUR/TRY opened at 1.4787 and 1.9782, respectively, while the benchmark bond yield was at 9.2%.

> Market Movers > Capasity use will be eyed... Today in Turkey, at 13:30 GMT April capacity use data and real sector confidence index are going to be released. Market expectation for capacity use is 68.6%. There is no data release at abroad.

158. Turkey central bank inflation report more dovish than expected Fortis April 30, 2010

Summary

The tone in the quarterly Inflation Report of Central Bank was more dovish than what the market expects. While the inflation forecasts were revised upwards, the Bank said that they expect the measured rate hikes to start in last quarter and forecast the short-term rates to stay in single digit levels in the foreseeable future. Seeing Central Bank so committed on this, we have to revise our forecasts accordingly with the first rate hike starting in October and a total hike of 150 bps this year. Beware that there will be an additional 50bps hike due to the change in the reference rate from O/N rates to weekly repo rates in the upcoming months. However, we stick to our terminal policy rate of 10% in mid-2011 despite the Bank's comments.

Analysis

* Today, Central Bank Head Durmu_ Yılmaz presented the second Inflation Report of 2010. There was a significant upward revision to the end-2010 forecasts. While the previous forecast of 6.9% increased to 8.4%, 0.4 pp of this stemmed from the stronger growth, 0.15 pp of if from oil prices, 0.55 pp from food prices and 0.4 pp from higher than expected effect of tobacco and oil tax hikes. However, the end- 2011 forecast was revised up by a marginal 0.2 pp to 5.4%. Our 2010 and 2011 forecasts currently stand at higher 8.0% and 6.0%. Moreover the output gap forecasts for 2010 and 2011 were revised slightly downwards.

* Despite some escape clauses, like more than expected impact from high inflation expectations, or looser than expected fiscal policy, the tone in the quarterly Inflation Report of Central Bank was more dovish than what the market expects. While the inflation forecasts were revised upwards, the Bank said that they expect the measured rate hikes to start in last quarter and forecast the short-term rates to stay in single digit levels in the foreseeable future. Bearing in mind the elevated inflation expectations, recovering demand conditions and the upward risks on inflation, we consider this to be too dovish.

* However, seeing Central Bank so committed on this, we have to revise our forecasts accordingly with the first rate hike starting in October and a total hike of 150bps this year. Beware that there will be an additional 50bps hike due to the change in the reference rate from O/N rates to weekly repo rates in the upcoming months. However, we stick to our terminal policy rate of 10% in mid-2011 despite the Bank's forecast to keep it in single digit levels.

159. Turkey | Watch the credibility gap in Europe RBS Timothy Ash April 30, 2010

In Turkey, its markets have held in remarkably well, despite the recent tribulations of its Greek neighbour. Despite Greek bond yields pushing up to 20% and 5Y Greek CDS at 800bps+, Turkish yields/CDS have pushed up just 20-30bps. This is remarkable but further testimony in my mind at least to Turkey's proven durability not just through the Greek crisis but also over the past 2 years of the global credit crunch. That said at least according to S&P Turkey's credit rating is now only one- notch behind that of Greece, at BB, versus BB+; with a public sector debt/GDP of just under 50% and a budget deficit of 5.5-6% of GDP, versus comparable ratios of 115% and 14% for Greece, even this rating arguably appears harsh to Turkey.

(+/-) Turkstat released merchandise trade data for March this morning, which showed a US$5bn monthly deficit. The consensus had been for a US$3.9bn deficit, albeit we had forecast a US$5bn deficit ourselves. The story was very similar to that being portrayed over recent months, i.e. a recovery in exports (+22% YOY) but also a strong(er) rise in imports (+43% YOY), partly reflecting a recovery in domestic demand gaining momentum, but also higher energy import costs. Note that oil prices are running 50% higher YOY, and given the usual oil price/import relationship this probably cost Turkey close to one-third of the YOY deterioration in the trade balance. Stronger exports and the recovery in domestic demand does though carry something of a silver lining; note yesterday the CBRT's suggestion of double digit real GDP growth in Q1.

The lira is holding in relatively well despite the weak trade data - perhaps herein the market is taking the bigger picture recovery message more to heart - albeit weakening against the euro but this is to be expected given the Greece relief rally. We doubt it will last. Turkey 5Y CDS is back at 170bps, while local rates seem to have taken heart from the dovish CBRT commentary yesterday, with yields on the ABN Amro benchmark TRY bond index back down at 9.14% this morning, having pushed up beyond 9.30% this week.

160. Turkey Real Sector Confidence Index shows recovery is gaining steam Fortis April 27, 2010

Data: April Capacity Use Date: 26 April 2010, 13.30 GMT Actual: 72.2 Consensus: 68.6 Previous month: 69.7

Data: April Real Sector Confidence Index Date: 26 April 2010, 13.30 GMT Actual: 118.8 Consensus: - Previous month: 110.6

Summary

In April, both the capacity use and the Real Sector Confidence Index (RSCI) indicated that the economic recovery is gaining steam. These increased the upside risks on inflation and are likely to pressure CBT to act quicker in the YTL liquidity measures and the interest rate hikes. We stick to our recently revised interest rate forecast that CBT will start raising rates on July and hike rates by 200 bps this year. In case such positive news on economic activity will be accompanied with negative news on April CPI inflation, to be announced next Monday, we would have to consider upside risks on this forecast as well.

Analysis

* Capacity utilization rate in April elevated by 4.3 pp to 72.2%, much better than the expectations for a reading of 68.6%. In seasonally adjusted terms, the monthly increase in the rate is a similar 3.9 pp and the seasonally adjusted capacity utilization rate of 73.0% is the highest since October 2008, according to our calculations. While the output gap still exists, the upward path of the capacity use means the economic slack is narrowing at a faster pace.

* Moreover, the RSCI rose to 118.8 in April, from 110.6 in the previous month. The current level is significantly higher than the critical threshold of 100, which separates the expansion and contraction periods in the economy. Besides, this is the highest reading since April 2007 and the cumulative rise in the last 5 months is a gigantic 27.6 pp, meaning that the economic activity is gaining pace. New orders index, which is a leading indicator for the headline index, pointed to the highest monthly improvement of 27.4 pp to 129.1 and supported the strong upward momentum.

* These increased the upside risks on inflation and are likely to pressure CBT to act quicker in the liquidity measures and the interest rate hikes. We stick to our recently revised interest rate forecast that CBT will start raising rates on July and hike rates by 200 bps this year. In case such positive news on economic activity will be accompanied with negative news on April CPI inflation, to be announced next Monday, we would have to consider upside risks on this forecast as well.

161. Turkey's Central Bank takes first step toward mopping up liquidity bne April 27, 2010

As emerging markets ponder how to address the problem of surging capital inflows, the Turkish Central Bank took a cautious first step to mop up liquidity from the banking sector, Hurriyet reported. The Central Bank, led by Gov. Durmu_ Yılmaz, has increased the proportion of foreign currency reserves banks must deposit to cover loan risk in the first step of a plan to withdraw the liquidity it injected during the global financial crisis.

The bank raised the requirement to 9.5 percent of foreign currency loans from 9 percent, according to a directive published in the Official Gazette on Monday.

The increase of half a percentage point begins the reversal of a reduction in the requirement to 9 percent from 11 percent made on Dec. 5, 2008. During the crisis, the bank also lowered Turkish Lira reserve requirements, extended the term of repo auctions to three months and acted as a broker to allow banks to borrow and lend foreign currency.

The decision is the first move the bank has taken since April 14 when it announced plans to ,,gradually" withdraw the steps it took to boost market liquidity during the crisis.

The increase is likely to pull about $600 million in foreign currency liquidity from the banking system, according to _nan Demir, chief economist at Finansbank in Istanbul. The Central Bank estimates the figure at $700 million.

,,The Central Bank made it amply clear that reversal of liquidity measures will precede [interest] rate hikes and the gradual nature of steps taken suggests that the bank will take its time in resorting to hikes," Bloomberg quoted Demir as saying.

Specter of asset bubbles

The decision comes as large-scale liquidity inflows into emerging markets, spurred by extremely low interest rates in advanced economies, are forcing policymakers to act in order to prevent new asset bubbles from emerging in the aftermath of the worst global recession the world has witnessed since the 1930s.

A report released on Monday by Standard Chartered noted that many countries do not have the capacity to absorb such inflows. ,,Thus, the money often ends up in equity or real estate, adding to inflationary pressures," Standard Chartered economists Gerard Lyons and Natalia Lechmanova said.

Speaking to Hürriyet Daily News & Economic Review, Veyis Fertekligil, chief economist at T-Bank in Istanbul, said the Turkish Central Bank aims to withdraw the liquidity it gave during the crisis back from the market. ,,The amount of funds that the Central Bank leaves in the market has started to decrease, starting from last week," Fertekligil said. ,,In short, we can say that the Bank started to apply its exit strategy."

Fertekligil said he expects the bank to implement the ,,technical interest rate" plan in the coming moths. ,,Within this scope, the interest rate benchmark will be the weekly repo interest and it will be at the level of 7 percent [as opposed to the current benchmark of 6.5 percent,]" he said.

,,I think that interest rate increases may start as of the last quarter," he said. ,,However, if inflation and commodity prices rise and the exchange rate [is distorted] such an increase may happen before."

Finansbank's Demir predicted a 2 percentage point interest rate tightening in the second half the year.

The surge of capital and liquidity inflows should be addressed with an appropriate policy response, as ,,the longer it takes to address it, the bigger the problem will be," the Standard Chartered report said. ,,The ultimate focus for emerging economies should be to learn the lessons of the crisis in the West, and to ensure that current flows do not feed speculative asset bubbles that will burst, triggering new financial crises. Hence the need for prompt corrective action.

,,The timing may vary across countries, but many may not have the capacity to absorb large, sustained inflows," the Standard Chartered report said. ,,In particular, their financial markets may not be deep or broad enough. Thus, when the money flows in, there are few places it can go, so it often ends up in equity or real estate, adding to inflationary pressures in both."

162. Turkey | Lessons of the 2000/01 crisis for Greece RBS Tim Ash April 29, 2010

Greece is absolutely the focal point for the market for obvious reasons at present, and we saw extreme market volatility across the board yesterday. Interestingly, the EM universe and within that CEEMEA, has held in relatively well thus far, albeit we did finally begin to see the cracks appear yesterday with Hungary looking weak (5Y CDS wider @ 250bps at one point, and local rates and the forint coming under pressure). Balkan credits also sold off, presumably for fear of a knock on effect through the region if liquidity problems emerge in Greek banks (30% market share in Bulgaria, 15% in Romania and a US$20bn loan book in Turkey, albeit in this latter respect this accounts for less than 5% of banking sector assets). Turkey 5Y CDS protection did widen out over the 200bps mark yesterday (from lows of 165-170 just a week or so earlier) before rallying back in as talk of a US$130-150bn IMF/EU support programme began to do the rounds. Generally investors seem to be taking a very constructive view still of EM, helped by the wall of money feeding real money investors still, i.e. that they generally do not face the same public sector balance sheet problems as their developed market peers. In Emerging Europe, fortunately the countries potentially at risk (BiH, Belarus, Latvia, Hungary, Romania, Serbia, and Ukraine) have already been "ring-fenced" with IMF/EU support programmes. Meanwhile, the "good guys" in the region, i.e. those with fully floating exchange rates, limited balance sheet problems (e.g. public/external debt) and solid/sound banking sectors look well placed to ride this through. We would put Turkey in this latter group, including Poland, the Czech Republic and South Africa. Turkey's economy minister, Ali Babacan, is expected in Athens over the next few days, and the local press has suggested that he might offer some "advice" to his Greek counterpart on how Turkey managed through its debt crisis from 2000-2001. To recap Turkey had a public sector debt/GDP ratio of over 90% in 2002, and managed to cut this to below 40% by the end of 2008; albeit it is heading north again at present but is still below the 50% of GDP mark. Importantly, Turkey avoided a forced restructuring, i.e. default, on its public sector liabilities, albeit there was some "soft" liability management via debt exchanges to lengthen maturity. Key in Turkey's case was its ability to generate strong real and nominal GDP growth over the period 2002-2007, helped by the initial devaluation of the lira in 2001, and then debt/GDP ratios were reigned in by subsequent real FX appreciation from 2003 to 2007. Strong budget revenue growth helped the government maintain primary budget surpluses, while an ambitious and ultimately successful privatisation programme helped reduce its debt financing needs, further reigning in the debt/GDP ratio. Turkey was also helped by successive and remarkably successful IMF programmes, the last of which was completed in May 2008.

The obvious difference between Turkey and Greece is that the former had exchange rate flexibility, which Greece clearly does not have. Greece cannot inflate, in effect, its way out of the debt crisis as monetary policy is beyond its sole control. This puts much more onus on generating real GDP growth, reforms in public finances (which arguably has been less successful in Turkey - where less progress has been made in overhauling expenditure items) and structural/supply side reforms such as privatisation. Generating high/sustainable real GDP growth in a weak European growth environment, and given the fixed exchange rate will be acutely difficult, and especially when in the short term the focus will be on fiscal retrenchment. The level of fiscal adjustment facing Greece, is also arguably much more challenging than that faced by Turkey back in 2001/2002, i.e. its debt ratios are much worse than Turkey, and the starting point in terms of the fiscal deficit is also worse, i.e. ~ 14% of GDP for Greece in 2009, versus ~ 12% in 2001 for Turkey. Perhaps the better comparable would be Latvia in 2008-2010, and herein the 30%-odd cuts in budget spending demanded as a the price of IMF/EU support and in defence of the exchange rate peg precipitated a 20-25% peak to trough decline in real GDP. Is Greece ready for this level of pain? I really have my doubts, which then leaves Greece facing some form of liability management exercise, voluntary or involuntary.

In Turkey today the highlight has been the publication of the Q2 Inflation Report by the CBRT. As I am writing, the CBRT press conference introducing the report is running.

Highlights herein include:

* The CBRT is raising its inflation forecast for 2010 to 8.4% midpoint, from 6.9%, with a 70% probability now that inflation will be within a 7.2-9.6% range (from 5.5 - 8.3%). The latest inflation print was 9.6% for April, but it peaked this year at 10.1% in March, which compares with the CBRT's 6.5% end year target.

* The bank now expects inflation to come in a 5.4 - 7.2% range in 2011, with a 70% probability, which compares with its previous 3.4 - 7% confidence internal (5.2% mid-point) and the bank's 5.5% mid-point target.

* Inflation is expected to reduce to 5% as of 2012, albeit this is 10bps above its previous forecast.

* The bank explains the hike in the inflation forecast due to a higher oil price assumption (US$85 per barrel for 2010, from US$80 in Q1), one-off food/administered price hikes (the bank's forecast for food price inflation in 2010 was revised up by 200bps to 9%), and the stronger evidence now of recovery which is closing the output gap at a faster pace than previously assumed. The bank talks of double digit real GDP growth expected now for Q1 2009, partly a reflection of the very low year earlier base (-14.5% YOY). The bank notes though that with unemployment expected to remain high the recovery was still not expected to be inflationary.

* CBRT governor Yilmaz still re-assured that he still expects interest rates to remain low for a while longer, but that if pricing behaviour changes the bank is ready to raise interest rates earlier.

* The governor noted that in the banks' base scenario is for "moderate" base rate hikes in/from Q4, which seems very dovish compared to some market participants expectations for rate tightening to begin as early as Q3, and for as much as 150- 200bps in hikes by year end. The word "moderate" does not appear consistent with triple digit rate hikes.

* The governor re-assured that rates can remain in single digits - the bank's current base rate stands at 6.5%, but as long as the government does its part by keeping a tight reign on fiscal policy. Yilmaz stressed that he expected the government's new fiscal rule to be agreed by the end of June 2010, and this timetable appears consistent with commentary from the Turkish Treasury. Clearly, if delivered, the fiscal rule would be a significant market positive/reassurance.

Conclusions from the above: Well the CBRT still seems much more dovish than the market, i.e. only talking about hiking in Q4 and only then moderately, i.e. more like 50-75bps in hikes, against the 150-200bps expected by the market, which is in fact consistent with our own view. The CBRT also did not change the target, albeit it did change the forecast, which provides "some" reassurance for the market.

163. Turkish central bank released its quarterly inflation report Danske April 30, 2010

Yesterday, the Turkish central bank (TCMB) released its quarterly inflation report. The TCMB raised its 2010 inflation forecast up (mid-point inflation forecast at 8.4% in 2010) and said that the data shows loose monetary policy. We are not overly surprised given the strong rebound of the Turkish economy and increasing inflationary pressures. In our view, the monetary tightening might come rather sooner than later, perhaps in H1 if inflation surprises on the upside.

164. Turkish central bank ups foreign currency reserve ratio bne April 26, 2010

Turkey's central bank increased the proportion of foreign currency reserves banks must deposit to cover loan risk to 9.5 percent of foreign currency loans from 9 percent in the first step of a plan to withdraw the liquidity it injected during the global financial crisis, Bloomberg reported.

The decision is the first move the bank has taken since April 14 when it announced plans to "gradually" withdraw the steps it took to boost market liquidity during the crisis. Today's increase is likely to pull about $600 million in foreign currency liquidity from the banking system, Inan Demir, chief economist at Finansbank AS in Istanbul, said in a report to investors.

"The central bank made it amply clear that reversal of liquidity measures will precede rate hikes and the gradual nature of steps taken suggests that the bank will take its time in resorting to hikes," Demir said. "We maintain our rate call that sees 200 basis points of tightening in the second half of 2010."

The increase of half a percentage point begins the reversal of a reduction in the requirement to 9 percent from 11 percent made on Dec. 5, 2008. During the crisis the bank also lowered Turkish lira reserve requirements, extended the term of repo auctions to three months and acted as a broker to allow banks to borrow and lend foreign currency.

165. Turkish central bank (TCMB) ups its quarterly inflation forecast Danske Bank April 30, 2010