Caught in the crossfire

Emerging Europe’s financial markets have been battered over the past month amid growing fears of a disorderly Greek exit from the euro-zone. Equities are down by around 10% in most of the region, while local currencies have fallen by as much as 5% against the euro. Meanwhile, a raft of Q1 GDP data showed that most of the region’s economies had slowed sharply even before the latest escalation of the euro-crisis. Admittedly, there are some bright spots. Russia and Slovakia surprised on the upside, while it looks like Poland also performed well. However, with leading indicators from the euro-zone reaching lows not seen since 2009 in April and May, we fear that Q1 could just be the tip of the iceberg. Needless to say, we remain comfortable with our below consensus forecasts for the region.