Prague, 30 October 1997 (RFE/RL) -- Eastern European stock markets have managed to survive surprisingly well during this past week of wild swings in stock and share prices around the world.
For the fledgling eastern markets, most of which have only been established in the last few years, this was a first taste of how swiftly and drastically investors can react in the increasingly globalised economy.
All of the region's bourses were affected by the huge international sell-off of shares triggered by nervous investors in Hong-Kong last week. That fit of nerves hit New York's Wall Street the following day, amid fears that Asia's economic downturn could spill-over into the U.S. economy. From there, the whole world was drawn into the spiral, with Russian stock exchange being among the worst hit among the transition economies.
Trading was suspended in Moscow after the bourse lost some 20 percent of its value, both the Estonian and Romanian bourses plunged to historic lows, a rattled Polish bourse lost nearly 10 percent of its value, and Hungary experienced a similar cascade. The Czech Republic was spared from the worst day of falls because banks were closed for a national holiday.
But Wall street rebounded massively early this week, with trading volumes hitting a record thousand million shares. That affirmation of confidence by U.S. investors had the same lightning impact as it had in the other direction. Shares rose strongly around the transition region, with Moscow shares rising 16 percent on average. But it is still too early to say whether the overall trend will be towards continued recovery.
For those whose nerves were stronger than most, there were profits when the dip was at its worst. In Tallinn on Monday, foreign investors still reeling from the panicky international atmosphere were selling heavily, but Estonian local investors were busy buying. Market analyst Anvar Samost attributed this to the greater local insight by resident investors, who could see that shares in Estonian companies were a good bargain.
In Warsaw too, stock exchange chairman Wieslaw Rozlucki said some Poles kept their heads and had made good profits by buying up when all 116 quoted stocks were down. He said there is no particular reason for anxiety.
In Bulgaria, where much of the official economy still remains in state hands, officials from the head of the National Bank (Svetoslav Gavriski) downwards indicated their country was largely unflurried by the wild week.
But London analyst Stuart Parkinson thinks the drama is not yet fully played out. He notes many stock exchanges around the world are still well down on their previous levels. And he says the tranition region needs to learn from what has gone wrong in Asia. He says relying too much on foreign investment can open up areas of risk. For instance, in the fast-growth Asian markets, bad corporate lending policies by banks played a key role in that region's collapse.
In a typical scenario, an international bank would lend short-term money to an Asian bank, which would immediately lend that onward to those investing for instance in over-valued and unneeded property developments. If the first bank recalls its money, the second bank is in trouble because it cannot quickly regain its assets in liquid form.
Parkinson says East Europe's exposure to this sort of problem is not generally so great, in that it is a new economic region which so far has not developed strong patterns of lending to individuals and the corporate sector.
But he says that as time goes on, and banks increase their lending to private companies, it will be essential for them to have the right safeguards in place. To create a suitable regulatory framework, transition countries will need proper assistance from financial bodies like the International Monetary Fund, he says.
Parkinson says it's proven time and again that the desire of bankers to lend money outweighs their prudence in choosing investment objects. If the region fails to create a sufficiently strong regulatory framework, it will be heading into the same problems that have caused Asia to stumble, he says.
A similar warning was issued by London-based market researcher Grete Schepers, who said that governments in the transition region must pursue sound financial policies in terms of holding down state expenditure and keeping corporate credit within bounds. She notes that big borrowings in hard currency can turn into a major problem if interest rates rise, or if the borrowers' currency falls.