The bankruptcy of the U.S. energy giant Enron Corporation has tarnished the reputation of U.S. financial markets abroad, but analysts in Eastern and Western Europe say investors still look to the U.S to set the standard in market regulation. They say that by exposing weaknesses in the U.S. system, the Enron fiasco will strengthen regulation and ultimately enhance U.S. prestige -- not weaken it.
Prague, 7 February 2002 (RFE/RL) -- Throughout the first decade of postcommunist economic transformation, U.S. financial markets were widely seen as the model to emulate.
With its strong central regulation by the Securities and Exchange Commission and high accounting and disclosure standards for companies, the U.S. was viewed as setting the global financial standard. U.S. experts were often exported to transition countries in Eastern Europe and Central Asia to help them set up their own financial markets.
The rapid collapse of Enron -- formerly the U.S.'s seventh-largest company -- no doubt has badly tarnished this reputation for transparent accounting and orderly markets. But experts in Europe say the fallout is likely to be temporary and will not permanently damage the U.S.'s reputation.
Roger Nord is the International Monetary Fund's regional representative for Eastern and Central Europe. Based in Budapest, he's written on issues of corporate accountability and transparency, especially regarding companies from Central and Eastern Europe.
He tells RFE/RL that, far from hurting the U.S., the Enron scandal may well help enhance the country's reputation for high regulatory standards.
"I don't think it will damage the U.S. reputation, because what we've seen at the moment is an enormous public focus on the [Enron] issue, and the result will be to strengthen, not weaken, the system," Nord says.
Anais Haraj, a stock analyst at Nomura Securities in London, agrees with Nord that Enron bruised the reputation of U.S. markets but that the damage is not likely to last. He points out the U.S. market is still widely perceived as having the world's best accounting and reporting standards -- higher, he says, than those in Europe.
"Let's be frank: Accounting standards in Europe just aren't as good as they are in the United States, and the regulatory structures aren't as great," Haraj says. "So there's a bit of a discount there already. People don't expect as much out of the European markets."
As the Enron scandal unfolds, stock markets around the world have been roiled by concern that other large companies may be hiding debts and overstating profits.
One big loser has been U.S. industrial conglomerate Tyco International. The value of Tyco shares fell about 50 percent this week amid concern over the company's financial practices.
Some of the money leaving stock markets these days is finding its way into gold. Gold prices shot to a two-year high of $305 an ounce this week due to concern over corporate accounting practices. Haraj says investors are looking for a safe haven until the Enron situation becomes clearer.
"Yeah, [the rise in the price of gold is] totally related to Enron and concerns about equity market valuations. [Gold's] gone up something like $20 [an ounce] in the past couple of days," Haraj says.
So far, the effect of the Enron failure on Central and Eastern European exchanges has been muted. The major regional stock exchanges in Prague, Budapest, and Warsaw are small and not always affected by international trends.
But Nord says the Enron failure does raise the fundamental issue of transparency still facing regulators, companies, and investors in transition countries.
"Some of the same issues, of course, arise in Central and Eastern Europe as well -- which is a failure of internal controls within companies and of external controls on those companies," Nord says.
Nord says he has witnessed many corporate failures and scandals during his years in Eastern Europe, but he adds few have matched Enron in their impact on a country's regulatory climate. He says one that comes close may be the failure of IPB bank in the Czech Republic, once the country's second-biggest bank when judged by deposits. IPB executives were accused of stripping assets and hiding debt before the bank was eventually placed under public administration in 2000.
The circumstances surrounding Enron's collapse are different from the scandals in Eastern Europe during the "Wild East" years of lax regulation that followed the collapse of communism.
Enron executives are not accused of "tunneling" -- or stripping -- assets and selling them off for personal gain, as unscrupulous businessmen in Eastern Europe and the former Soviet Union did during the 1990s. Instead, Enron managers allegedly hid the company's debt in order to inflate the company's value and drive up its stock price. They later sold the stock and pocketed millions of dollars.
But in many ways, the results are similar. A formerly solid company is forced to declare bankruptcy. Investors and possibly taxpayers shoulder the financial burden, while company executives go free or receive only mild punishment.
The Enron case is in its early days, and more than a dozen congressional committees and federal agencies are currently investigating the bankruptcy. It's not yet clear which laws, if any, were broken.
Nord says securities regulation and stock trading in the transition economies have come a long way since the 1990s. He says this is especially true in the Czech Republic, where the voucher-privatization program in the years after communism flooded the Prague stock exchange with insolvent companies.
"The institutional structure, the requirements for disclosure were quite insufficient. As a result, many shareholders lost their money during this period in the Czech Republic. There have been changes made that go very much in the right direction," Nord says.
He says the abuses of the 1990s eventually led to the creation of a Czech Securities Commission modeled on the U.S. Securities and Exchange Commission. Since the establishment of the Commission, he says standards have risen and the number of companies on the exchange has been sharply reduced.