Weaker euro-area may affect Emerging Europe
Subject The fallout in Central-eastern Europe (CEE) from Brexit. Significance While CEE government bond markets are being supported by investor expectations of further monetary stimulus in response to the uncertainty stemming from the UK decision to leave the EU ('Brexit'), the zloty is suffering from both its status as one of the most actively traded emerging market (EM) currencies and concerns about the policies of Poland's new nationalist government. A sharp Brexit-induced slowdown in the euro-area economy would put other CEE currencies and equity markets under strain. Impacts The ECB's full-blown QE is helping keep government and corporate bond yields in vulnerable southern European economies historically low. Uncertainty generated by Brexit reduces the scope for further US interest rate hikes later this year, lifting sentiment towards EM assets. The Brexit vote will increase investors' sensitivity to political risks, auguring badly for Poland. Poland has already suffered a downgrade to its credit rating mainly as a result of the interventionist policies of the PiS government.