ECB cuts rates to 3.25% and economists expect further cuts by 2009

CEE is not immune from the global credit crunch

Things need to change to gain access into the EU

US mortgage rates are falling

Canadian Government buys up insured mortgages

Russian developer clarifies its debt position

ECB cuts rates to 3.25% and economists expect further cuts by 2009

European currencies including the euro, British pound, and Swiss franc were hit hard this week as three of the biggest central banks in the continent – the European Central Bank (ECB), the Bank of England (BoE), and Swiss National Bank (SNP) – all slashed interest rates.

The BoE slashed its interest rate by -1.5% to 3%, ECB policy makers cut its benchmark rate by 0.5% to 3.25% and the SNP reduced its interest rate by -0.5% to 2% as part of a continuing effort on the part of the global financial turmoil.

The rate cut by the ECB was largely in line with expectations. The European Commission said that the Euro-zone was steady in a technical recession and predicted economic growth would come to a virtual standstill next year.

The Euro-zone economy, which has grown steadily since the bloc’s creation in 1999, contracted by -0.2% in the second quarter this year and most economists expect further decline in Q3 2008.

According to a Reuters’ poll, the ECB will follow up this interest rate cut with another by the end of the year and into 2009 as the economy slows down. The majority of 57 economists polled expect the bank to cut again by the year-end with most saying by another 0.5%.

The ECB set the path for further cuts to come after Jean-Claude Trichet, ECB’s President, said in its regular post-meeting press conference that while the bank was never pre-committed he did not exclude decreasing interest rates again.

CEE is not immune from the global credit crunch

Real estate investment has dried up in Central and Eastern Europe (CEE) in recent weeks as it suffers from the credit crunch.

According to Tomasz Trzoslo, head of investment at Jones Lang LaSalle in Poland, the global financial turmoil had only a marginal impact on real estate in the CEE region at the beginning of the year. But this is no longer the case.

Speaking to PropertyEU, Trzoslo said: “In the last couple of weeks the situation has changed dramatically. There are a number of buyers who have stepped out of the market. This is especially true of German open-ended funds. A couple of them are not able to buy now as they have frozen investor redemptions. Other potential buyers are taking a wait-and-see attitude.”

Some investors have enough funds to carry out acquisitions but the pricing of assets is not competitive due to the lack of competition. “The number of transactions is close to zero,” Trzoslo said.

He stressed that an important component for recovery would be banks starting to lend again on more competitive terms to give buyers much-needed confidence.

Things need to change to gain access into the EU

The European Commission (EC) recently issued on its annual reports on eight Southeast European countries’ accession progress, saying Croatia could complete its entry talks with the Union next year, if it meets the requirements.

It also urged six other Western Balkan countries and Turkey to speed up the implementation of political, economic and legislative reforms in order to gain membership sooner. Croatia, one of the three official EU candidates, along with Turkey and Macedonia, began its accession talks with Brussels in October 2005. Of the 35 chapters, or policy areas, that form part of the negotiation process, negotiators have opened 21 thus far, closing four of them provisionally.

The EC, while critical of Turkey’s pace of political reform, for the first time recognised the country as a “functioning market economy”, a key economic benchmark. The country still needs to ensure free and fair elections and to improve dialogue among major political parties and figures, it noted.

The EC reports urged the aforementioned candidate countries and the five potential candidates - Albania, Bosnia and Herzegovina (BiH), Kosovo, Montenegro and Serbia - to take bold action against corruption, which remains widespread across the region.

Albania , BiH and Montenegro are moving ahead with the implementation of their respective Interim Agreements, the EC said. They still need to consolidate the rule of law and administrative enforcement capacities. The EC called on Albania to conduct its 2009 elections in line with international standards and on Montenegro to pursue aggressive judicial reform. The EC also voiced concern over the rise of nationalism in BiH in recent months. The EC report on Kosovo noted its widespread corruption and organised crime, saying the country’s European integration was generally “at an early stage”.

US mortgage rates are falling

Mortgage rates in American fell this week as consumers cut their spending amid an economic downturn and a major slump in the labor market.

Mortgage finance firm Freddie Mac said that 30-year fixed-rate US mortgages averaged 6.2% this week, which is down from the previous week’s 6.46% and below. Rates on 15-year fixed-rate loans fell to 5.88% from 6.19% last week. A year ago, the rate was 5.9%.

Five-year adjustable-rate mortgages fell to 6.19%, from 6.36% last week. A year ago, the rate was 5.89%. The rate on a one-year adjustable-rate mortgage fell to 5.25% from 5.38% last week. At this time last year, the rate was 5.5%.

Rates for 30-year fixed-rate mortgages have been at 6% or higher for four straight weeks. Between the week of 9 th October and 16 th October, 30-year mortgages saw their biggest weekly jump since April 1987, rising from an average 5.94% to 6.46%.

Canadian Government buys up insured mortgages

The Canadian Government recently said it will buy up to $7bn of insured mortgages from financial institutions, which is the second chunk of a C$25bn plan to help banks free up cash for lending and overcome credit market constraints.

Acting through Canada Mortgage and Housing Corp federal agency, Ottawa will purchase mortgage-based securities maturing in 2013 in an auction. It will set up a minimum yield for the transaction to ensure a return on its investment. According to Jim Flaherty, finance minister, the plan will help cushion banks from the global financial crisis and address a scarcity of private-sector lending.

The government bought a first tranche of mortgages worth C$5bn last Thursday. It obtained an average yield of 4.241%, above the minimum target set, suggesting a healthy interest in the auction. However, the number and names of participating institutions was not made public.

Russian developer clarifies its debt position

Sistema-Hals, one of the biggest real estate companies in Russia, has clarified its debt position in response to press speculation that the Russian developer needs to refinance large debts.

The Board of Sistema-Hals wishes to clarify that Sistema-Hals currently has $1.2bn of debt of which only around 20% is short-term debt, approximately $20m of which falls due for repayment before the end of 2008. Repayment terms for most (c. $700m) of the long-term debt extends to 2012.

Sistema-Hals’ immediate priority is not servicing its debt but financing its construction program. The company is currently finalising its strategy, action plan and budget for 2009 developed in response to the current market conditions. The final strategy is due to be announced in November following its approval by the Board of Directors in late October.

Sergei Shmakov, President of Sistema-Hals, said: “The global liquidity crisis which is affecting markets around the world, including the Russian real estate sector, has necessitated a prudent review of the priorities in our investment programme. Given the attractive, long term fundamentals of the Russian real estate market, and Sistema-Hals’ key strengths, we believe that the company is well placed to ride out current market turbulence and continue its development in a medium term perspective.”