Does ERSTE practice what it preaches?

There must be a communication break down within Erste. Few weeks ago it came out downgrading the market value of its investments throughout CEE. But yesterday the same bank published a research report that advises investment in the region. To give credibility to the report the Erste resercher points to three reasons for this interesting conclusion: lower level of public debt, fiscal consolidation, lower current account deficit.

Allow me a smile with a hint of disbelief while I scratch my head. I do not even care about the reasons expressed in the report. A first year undergraduate student can identify them also as weaknesses for the region only by  changing the benchmark . For example public debt looks much worse for those countries if they compare it  with their OWN public debt in 2008. But this is not the point I want to discuss here.

The point is that, if those countries have to offer great investment opportunities then why is ERSTE writing down assets and “goodwill” throughout the region?  It should do the exact opposite: add own capital and investment to the region. Instead ERSTE is trying to convince clients and other investors to take the risk on the region.

Could it be that it has something to sell and wants to make sure that the current price does not fall further?




12 thoughts on “Does ERSTE practice what it preaches?

  1. erste bought banks in boom years and paid huge premium (bcr was bought for 5.6x book value). that’s goodwill hard to sustain today even if cee economies are in better shape. it’s tough out there, you have to write it off.

    if it had bought a bank yesterday at 0.5x book value then it would have been legitimate to ask them to put their money where their mouth is. i think they do that anyway = ther cee exposure hasn’t gone down, or at least, not dramatically down… need to check their figures

    1. @mr goodwill
      I know it is tough out there. My problem is with consistency. If I run a business that has operational losses and things “are tough” do I turn around and sell the environment as improving to my clients? I am not saying they are exiting. It could be that they might not like certain assets in their portfolio.
      Also, a bad investment in “good” times should not be used to justify operational losses. Finally, what other exposure is there to go down for them besides CEE?

  2. I don’t think Erste plans an exit :). I think they are a bank, and we should never try to understand the views of a bank when it comes to research/opinions/target prices/etc. They always have personal interests. This is general. In particular, as far as I know Erste brought 4-5 bn in Romania. Of course they wanna make people believe that we are a sort of new heaven, and they should at least visit :).

  3. @florin
    my point was they had to wrie-off (significant) godwill which they were carrying from 2006 (golden years, boom, fantasies, hopes, etc), while the claim on CEE improvement runs vs 2009 (yr of max imbalances in CEE).

    I don’t necesarily see contradiction. EBRD also said yesterday economic fundamentals in the region are stronger than before start of 2008-9 crisis:

    1. Funny things those benchmarks.
      Aren’t EBRD, IMF etc. the guys that in 2007/8 claimed that C/A deficits should not be feared? Didn’t they give the Baltic states as examples? Aren’t they just now updating downwards their forecasts for the global economy?
      So, these guys are now saying that higher public debt relative to 2009, financed at very short term, is not a problem. Chocked domestic demand and lack of foreign investment which drove C/A deficit down together with higher public debt is described as improvement. If that is true, I will be happy to report on higher business investment in the months to come. But do not hold your breath.
      If you remember in 2006 the “claim” for the outrageous price had of course a benchmark and a story. The story was need to support the difference in price versus benchmark for the industry. Some even remember the story: convergence to EU standards. Unfortunately it turned out to be a fairy tale.

      But maybe I am just a skeptic.

  4. @florin
    points taken: higher debt at short term and lower C/A deficit on lower FDIs are NOT an improvement

    but lower fiscal imbalance, and lower external financing need probably are – and to be completely frank i quite don’t mind Romanians adjusting their consumption behavior 🙂

    Erste’s report also says the scaleback of the cyclical component was the biggest contributor to the slump in 2009. maybe i am wrong, but i don’t see around factories running at overcapacity…

    1. @mr goodwill
      Romanian consumers are already adjusting their behavior on the back higher VAT and lower disposable income. Also, there could be an improvement in the fiscal balance but for Romania I would like to know more about the arrears.
      I am working on something about the recession and policy responses. Also, my piece today on NGDP targeting deals a little bit with this. My point is that I am not sure if the recession was due to an aggregate demand shock or to a negative productivity shock. But I will write on this later (of course for Romania).

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s