In the early 1990s, the countries of central and eastern Europe (CEE) rejoined Europe, the market economy and reacquired democracy. Soon after, stock exchanges were founded or reopened throughout the region. Although these exchanges pointed a way to the economic future, their absolute size and relevance for corporate funding remains small to date.
Many experts have made proposals for mergers and for intensifying co-operation. Memoranda of understanding have been signed and promoted in the media. But little has happened. This leads to two questions: why, and is it likely to happen in the future?
Many European stock exchanges and especially the small ones in the CEE region are not per se profit-maximising entities. CEE exchanges are symbols of transition and of national pride. The cost of running them is comparatively small and many governments, alongside the local financial and corporate community, cover the costs by accepting higher trading and listing fees.
Domestic dimension
These exchanges are primarily focused on the domestic market and on domestic banks and brokers. They often use inexpensive trading systems, tailor-made to local needs and incompatible with the trading infrastructure of international banks and brokers. Potential foreign remote members find it difficult to connect their systems to these markets. This is further aggravated by incompatible clearing systems.
Foreign investors are typically under-represented, liquidity is low and companies are often undervalued. Only if all potential client groups (retail customers, domestic institutions and international investors) participate equally in price discovery can the best possible valuation for listed companies be achieved. Companies are confronted with high funding costs resulting from valuation discounts, and the regional banking industry incurs higher costs due to non-harmonised trading and settlement systems, and a multiplication of processes.
Things are unlikely to change quickly. The pressure from locally listed companies and an increasingly regional banking industry will drive exchanges towards reducing costs by using common trading and clearing platforms. Talks between the regional exchanges have been going on for many years but with little outcome. The only drivers of concrete action have been outspoken problems and/or periods of sustained losses at individual exchanges.
When the Budapest Stock Exchange’s turnover declined several years ago and it incurred losses, a local group acquired a majority share and sold it to a consortium of the Vienna Exchange and Austrian banks BACA, Erste and RZB. Another likely candidate is the Bratislava Stock Exchange, where trading never took off.
Little pressure to act
Pressure on the exchanges from their owners and the financial and corporate communities to act is moderate. The big players in European exchange consolidation, like Deutsche Börse and Euronext, are unlikely to devote scarce management capacity to a possible acquisition of 2% of European capitalisation through complex and protracted negotiations with multiple exchanges?
The Polish market is the most important in the region in terms of capitalisation, followed by the Czech and Hungarian markets. Any interest from international exchanges will focus on the Polish and Czech markets, and any regional solution is likely to succeed if the main exchanges (Warsaw, Prague, Budapest/Vienna) join forces.
Some CEE exchanges will intensify their co-operation, especially when investments into new trading and clearing systems or upgrades of existing systems are due. Trading hubs will emerge, the settlement systems will be harmonised, trading and especially settlement costs will be substantially reduced. Liquidity and valuation discounts of these markets will gradually disappear and the importance of the stock market for corporate finance will increase accordingly. But any substantial progress in consolidation in the next five years would be a big surprise.
Erich Obersteiner is head of equity capital markets at Raiffeisen Centrobank AG and formerly joint CEO of Wiener Börse AG, the Austrian exchange.
