Macroeconomic outlook remains positive but geopolitical risks linger

A number of flash GDP estimates for Q4:2010 reveal that the economic recovery remains on track across the region. Local currencies, local rates and external debt markets broadly weakened over the last few weeks in view of the escalating geopolitical tensions and scaled-back monetary tightening expectations in several countries in New Europe. Turkey’s recent underperformance provides a potential window of opportunity, especially in view of a possible upgrade of the country’s credit rating later this year. We like short positions in Romania’s 1-year CDS and longs in the 8.50% May 2012 EUR-denominated Eurobond as the country’s fiscal position appears to be improving gradually.