The World Is Not So Flat in Istanbul...

Risk / Return Themes For Private Equity Investments

Our world is changing and in response, risk vs. return themes and profiles are also registering substantial shitfs. It is important to know exactly what these new themes are.

Current relevant RISK theme:

Credit Risk. Before the financial crisis hit, there were a large grouping of companies that relied on a steady flow of credit from banks to feed their OPEX in order to grow. These companies have always had good management and their markets were showing healthy signs of steady growth. Many private equity firms did not see much risk in their way of operation (or at the very least they did not put much weight on the potential risk these companies posed).

The risk profiles of these companies has changed dramatically. Without adequate credit, many of these firms have been forced to liquidate large portions of their operations. Within a single quarter, we saw these companies go from healthy to distressed due to a lack of OPEX capital.

Current relevant RETURN theme:

Stability. The primary return expectations have also changed dramatically over the past six months. Private equity and venture capital firms have consistently performed under par of what they originally promised to their limited partners. Expectations of grand returns during a severe downturn in overall global valuations is unrealistic and therefore most LP’s have opted for stability rather than growth.

At least for the time being, I believe LP’s are more concerned with ‘safety’ rather than ‘aggressive growth’. The problem here is that a private equity firm is not designed for ‘safety’  but rather tends to concentrate on aggressive risk taking.

In the new and transformed investment world of today, I believe private equity firms must be able to shift their focus rapidly between aggressive growth and stability as LP’s are now demanding more rights and flexibility from GP’s.

It will be very interesting to see the sea of change that is up against the private equity and venture capital worlds.

Financial Times: Goldman to buy discounted private equity holdings

Here we go... we're going to see many of these deals over the next six months. I believe this is the first indication from the industry that the bottom is upon us. There are many private equity firms in serious trouble out there and I overheard several friends mention that these portfolios could be going at upto 75% discounts! This is a spectacular blow to LP's but represents unbelievable deals for those who are still liquid.

 

Goldman to buy discounted private equity holdings

By Deborah Brewster in New York

Published: April 12 2009 23:30 | Last updated: April 12 2009 23:30

Goldman Sachshas raised $5.5bn for a fund to buy discounted private equity holdings – the largest amount ever raised for a fund of this type – as investors anticipate a flood of forced sellers trying to offload private equity stakes.

Goldman’s Vintage V fund last week closed to new investors after 10 months of fundraising, having surpassed its goal of $5bn. The fund is a so-called secondary fund, which buys investors’ holdings in private equity and buy-out funds.

The successful fundraising reinforces the view that the private equity secondary market is where most deals are expected to happen in the next year, as investors try to raise cash. JPMorgan Chase is also raising a secondary fund and is believed to have attracted $500m over the past few months.

Banks, which account for about 25 per cent of private equity investors, are expected to be big sellers of their holdings as they seek to raise capital.

David de Weese, a principal at Paul Capital, a secondary market firm, said: “There is $130bn of private equity on the balance sheets of the six big US banks and AIG. AIG alone has $30bn. When you have a federal regulator sitting in your office, you develop a new view of what you are willing to sell.”

Investors who buy into private equity funds cannot redeem their investments. A sale to another investor or secondary fund is the main way out. Until recently, they often sold at a premium. However, the holdings have in recent months been changing hands at record discounts of more than 50 per cent of the original value.

Mr de Weese said that hedge funds with private equity holdings had emerged as new sellers, especially if they were facing big redemptions. Pension funds and endowments are also sellers, as the fall in the value of their equities has left them overweight in private equity.

Last year, the Calpers pension fund sold more than $2bn in private equity. Harvard’s endowment fund tried to sell $1.5bn in holdings this year, but was unable to get a high enough price.

Orin Kramer, chairman of the New Jersey pension fund, said: “The secondary market will become very interesting, We’re carefully watching it. But it’s a pretty treacherous due diligence. There is too wide a gap between what sellers pray for and what buyers will pay . . . in aggregate, a lot of private equity valuations are overstated. They don’t reflect reality.”

 

Co-invest or Not to Co-invest

Tough economic times often bring a heightened sense of risk aversion for private equity and venture capital players. This is the case in the most developed of economies and in those that are developing, i.e. Turkey and the Balkan region.

One way to reduce risk is to allow co-investors into your deals.

The benefits of co-investing into deals are obvious: sharing of due diligence work, resources, best-practices and know-how. The ultimate goal is to be able to share the risk of investment.

As appealing as it may seem, there are several other factors that I believe PE and VC firms must be mindful of when experimenting with co-investment opportunities. First and foremost, the identification of a potential co-investor will most probably divert more resources from your firm that what is often initially planned. Almost everyone in the PE and VC community has ample experience in trying to identify fresh funding for new companies. This is primarily an exercise in exactly that: identifying new sources of funding for your deal. It can be challenging to find the right investor for the right deal.

Size of the deal matters when considering co-investment partners. All private equity and venture capital firms have target investment sizes and other criteria that their deals must meet. It is often difficult to compress and balance all of the criteria of multiple investors into a successful deal. The chance of the deal falling apart also increases as the number of co-investors increase.

Beware of the ego. For some reason the ego problem is much more prevalent in private equity and venture capital firms in developing nations than they are in more developed economies. That is simply what I’ve noticed over the years – however other investors may certainly have different experiences with competing egos. After all, it is human nature to try to become the hero – it just becomes rather complicated when we are dealing with other people’s money!

All PE and VC firms have set agendas and strategies for when they enter deals. Co-investment may produce tremendous conflicts of interest from the moment of closing until the actual exit. Each investor will have varying ideas and demands on how to grow their portfolio companies (organic or inorganic), who will manage the growth, when to consider an exit, what the exit strategy will be, etc… A refined definition, understanding, and agreement of all voting rights is an absolute must when going into a co-investment deal.

Although co-investment may sound like a good idea at the outset, it can turn into an unproductive deal at the end of the exercise. This is especially the case when working in developing nations. Investors must be ready for a bumpy ride.

 

How to Find the Best Deals in Turkey

Deal sourcing in Turkey can be a very daunting task for those who are not knowledgably of the local business culture. It is far different from the formal deal sourcing that investors are so used to in Western Europe or in North American environments.

The first thing many investors must take notice is that the market is relatively small as compared to other developed nations. To this end, practically every corporate advisory, private equity and venture capital firm is after the same group of companies. This can easily create an awkward environment where potentially everyone knows what everyone else is working on.

In an eco-system where deals are often known to be handled by multiple players, any confidentiality or exclusivity agreements lose some of their impact on the process. Clearly this is not the case with every deal – especially those that are traded publicly or those that are significant in size.

There are no ‘unique’ ways to identify new deals in Turkey. The process is really no different than it is in any other country. Investors should rely on local partners with local know-how and local networks.

There is one thing investors should keep mindful of here: everyone will claim to have access to the richest and most influential CEO’s in the country. The minute you hear this…. hold on to you wallets. It is interesting that many those that claim to have deep networks do actually have them – it is amazing how everyone knows everyone else in this country. What is critical is that not everyone will do business with everyone else so international investors must be careful to chose a partner who has business credibility and is known to deliver and produce actual results.

What can the Balkan Region Learn From the Western Markets?

It is often regarded that the Balkan Region must have to ‘learn’ from Western markets and not the other way around. I’ve now been living in Turkey since only last summer so it hasn’t even been one full year, however I can assure you that there is plenty of learning to do on both sides of the coin.

I do not believe in the fact that ‘best practices’ and ‘know-how’ are what the region can take from western markets. More often than not, many industry experts in this region have received their grooming in western companies in the first place. They automatically bring ‘most’ of the practical knowledge with them as they represent western funds/capital.

There are, however some general complaints I often hear from local private equity and venture capital players. These are:

1.     Lack of good deals

2.     Unreliable management

3.     Inadequate book-keeping and accounting practices

4.     Deal sizes often too small

5.     Lack of overall transparency and growth opportunities

Ironically, these have been the EXACT same complaints and arguments I hear from Californian investors. It seems private equity and venture capital must solve similar challenges in each region. After all, we are in the business of identifying the right deal and increasing its value before exit. This template is the same wherever you go.

So, what is it really that the Balkans region can learn from the West?

The answer is not what it can learn from the west, but what it can teach itself.

Most funds in the US are capitalized by actual US investors whereas a large majority of the funds in Turkey (and I’m assuming the Balkan region as well) is capitalized by foreigners – primarily US or European investors.

In my opinion, the critical lesson all Turkish investors must ‘teach themselves’ should be the ability to communicate the reasons why foreign investors should choose this region as opposed to any other. Turkish funds must realize that international investors do not have adequate knowledge about Turkey as they do on other places such as China, Brazil and Russia.

I have yet to see a compelling presentation as to why any investor should choose Turkey over other developing nations for their investments. I have not yet seen rates of return on private investments as compared with other nations across the globe (or even for that matter, with other European nations).

If Turkish funds want to capture more investors then they must be able to show them actual concrete evidence why choosing Turkey would be an advantage.

Which investors are interested in Turkey and the Immediate Region?

In light of the epic restructuring that is taking hold of the global financial markets, we have been witness to wild fluctuations in investor appetite for emerging markets – specifically for Turkey.

The question is not ‘which’ investors are interested in Turkey as we still see the usual suspects in the market for deals. The questions would be more appropriate as: ‘how has investment strategies changed throughout the region’?

It should come as no surprise that private equity and VC players tend to be some of the most flexible and diverse investment platforms available and to this end, they often have an uncanny ability to shift gear in times of uncertainty. This is why many players that I speak with have either altered their investment strategies or have consolidated their positions considerably.

In terms of investment strategies, I’ve mentioned in previous posts that private equity and venture capital has essentially taken up the void in the credit markets left by banks. Many of these institutions are now focusing on structured debt instruments as their primary offering to both private and public companies across the region. The days of buy-outs seem to (at least for the time being) have left us.

In addition to this new investment strategy, there is considerable consolidation of portfolio companies being realized. I heard from a good source that some private equity players are offloading their portfolios at an average discount rate of 75%.

We should be mindful that as the economy turns positive, many of these ‘new’ investment strategies will once again be shelved in exchange of ‘buy-outs’.

Economist Intelligence Unit - Turkey 2009 Report

Below is a presentation developed by the Economist Intelligence Unit focusing on the Turkish economic outlook. The general outlook is that the country will be faced with a difficult year based on falling exports, its inability to sign a deal with the IMF (although I am hearing that a ‘watered down’ version of the IMF deal will be signed after the general elections on March 29^th) and the upcoming refinancing requirement of about €30-40 billion of public and private debt.

The problem here is that many companies have rallied up significant foreign currency denominated debt over the past several years. Although there is an interesting opportunity for distressed debt funds, there remains a real currency exposure risk as we move forward. This delicate balance being played out by both local and international investors will not be for the faint of heart.

Download Economist Intelligence Unit -Turkey Outlook .

 

 

Don't Panic Folks: Capitalism Will Save Us!

All morning, I’ve been reading articles about the inevitable decline of capitalism as we know it.

All a bunch of hubris. Capitalism is alive and is doing very well, however I believe it is being undermined by this unprecedented and tremendously ineffective ‘bail-out’ plan.

I think the very statement of ‘capitalism on the decline’ refers to the concept of ‘economic bubbles’.

Economic bubbles are a common phenomenon in nations whose industries work under highly unregulated systems where the concept of ‘oversight’ is nothing more than an institution responsible for tracking statistical data. Yes, I'm referring primarily to the US system here. We have to ask ourselves why we don't see purely 'European' economic bubbles (note that the current troubles in the European and Asian economies can be traced primarily to the practices of US companies).

Economic bubbles come and go in cycles of 10 years or so. The Savings and Loans(1980-90), Internet (2000) and now the Financial (2008-??)...

The solution is not 'bail out' but 'prevention'. This entire financial debacle could have been prevented and you only have to dig below the surface of only one of the conspirators’ (AIG) investment practices to know why.

I am a spectacular believer that capitalism works and it works well - only through careful and prudent oversight by truly 'independent' regulatory institutions. If these institutions (SEC) happen to fail, I believe they should also take partial responsibility of the crisis.

At this point, our argument is that AIG and its posse were able to con so many institutions and governments around the world that it 'cannot' be allowed to fail because if it does, then it would bring down the rest of the world. There is no doubt that the failure of these massive institutions will cause havoc, however forcing each and every US tax payer to save these companies is only akin to taking money from your left pocket and putting it back into your right pocket.

It is not a solution.

The closure of these institutions will leave a legitimate void in the system and there are other companies all around the world that were prudent enough not to take on faulty practices, who will fill in this void. This is how capitalism works. The closure of these toxic institutions will not drive us back to the stone ages. As painful as this transition of power will be, there is nothing to worry about.

One good example of this is the closure of so many of the investment banks. There are thousands of profitable and 'working' investment houses that are now taking over the role of their bankrupt and careless 'brothers'.

Contrary to common belief, we should all view the capitalist system as one that is dynamic, self preserving and continuously evolving.

 

 

The great capital exodus!

An interesting article from today's Financial Times. Being in Turkey and faced with the financial markets squeeze first-hand, I can say with ease that the main reason for the massive levels of capital leaving emerging markets is that fear of severe volatility in the market place. No one simply knows what the next day will bring. This is why most businesses in Turkey have already secured their reserves in traditionally safe currencies and institutions.

It seems to me that the everyday person in emerging countries have a much keener sense of our economic situation and risks that it brings to our every day lives. I think it stems from the fact that people in emerging markets have traditionally felt the pains of economic volitility and protectionist/politicized decisions by wealthy countries.

 

Emerging market finance: a gap to fill

By Alan Beattie in Washington

Two years ago, nearly a trillion dollars flowed into emerging markets as investors in rich countries toured the globe in the hunt for yield. Now there is a melancholy long, withdrawing roar as private capital flees to safer havens.

In the past, when the money stopped flowing in, it precipitated financial meltdowns – across Asia and in Russia in the 1990s and in Latin America a decade earlier. This time, it is increasingly clear, the official institutions set up to cushion the impact are too small for the task.

Net capital flows to emerging markets will drop to just $165bn (£115bn, €130bn) this year, down from $929bn as recently as 2007, according to estimates by the Institute of International Finance, which represents the world’s leading financial companies. Net lending from commercial banks, the IIF says, is likely to go into reverse.

The reasons for this are not altogether straightforward. Some accuse rich governments, particularly the US, of “crowding out” emerging markets, sucking up all the available capital to finance their stimulus packages. But Brad Setser, a former International Monetary Fund and US Treasury official, notes that as the private sector retrenches, the US current account deficit – and hence its need for outside financing – has actually been declining.

More likely, he says, is that emerging markets are being hit by a general decline in demand for riskier assets, as banks and investors haul money back home to shore up balance sheets and reduce borrowings. Similarly, the global shortage of the trade credit that finances cross-border commerce reflects a general desire of banks to reduce leverage, not the rich countries hogging all the available loans.

Enter, in theory, the official sector. In the same way that the rich world’s governments are proving to be the consumers and lenders of last resort, movements in international private capital flows can be offset by the IMF and its sister, the World Bank – along with smaller cousins including the regional development banks for Asia, Africa and Latin America. “At a time when the other financial institutions in the world are in turmoil, we can lean forward to help,” says Robert Zoellick, World Bank president.

But they cannot lean forward very far without overbalancing. “There was a very large run-up in the private sector’s exposure to the emerging world during the boom years, and no equivalent increase in the official sector’s lending potential,” Mr Setser says. “It is just not big enough to fill the gap.”

For example, Mr Zoellick says the International Bank for Reconstruction and Development, the arm of the World Bank that lends to middle-income countries, can increase its lending to about $35bn a year. That is two or three times its level in recent years, but it is not enough to fill a hole that could total hundreds of billions of dollars. Its limited capital constrains it from going too much further.

Last Friday the World Bank, along with the European Investment Bank and the European Bank for Reconstruction and Development, announced a €24.5bn ($31bn, £21.7bn) plan to shore up banking systems in central and eastern Europe. But markets were unimpressed, judging it too small.

 

Similarly the World Bank, together with national export credit agencies and other institutions, is trying to put together a package of $25bn to ease trade finance. But as Mr Zoellick admits: “Frankly, given the need out there, I’m not sure it’s going to be enough.” Private sector participants at a World Trade Organisation trade credit conference last year said there was a $25bn shortage that needed to be filled right now.

Even more pressing, given its role as a short-term lender to countries in crisis, is the size of the IMF. The fund in effect cycles money among its member governments like a credit union. The “quotas” that each government contributes determine how many votes it has on the executive board. The IMF currently has $142bn in easily available resources, plus another $50bn or so it can borrow from its richer governments if necessary. On top of that, Japan recently finalised an ad hoc loan of $100bn outside the quota system.

But a flurry of lending to small and medium-sized countries in trouble – Iceland, Ukraine, Hungary – has already started to deplete its resources. Crises involving a string of bigger countries such as Turkey – already in talks with the fund – could threaten to exhaust its supply.

Dominique Strauss-Kahn, IMF head, wants to double its lending capacity to $500bn: last month he won European Union leaders’ backing for the boost. But Simon Johnson, a former IMF chief economist, reckons the fund might need $2,000bn to be a serious global player. As in Hungary and Iceland, the IMF can encourage institutions such as the European Commission or individual governments to supplement its rescue programmes with bilateral money.

But private investors are more likely to be reassured by a multilateral lender arriving on the scene with a big war chest than one passing round the hat each time. Other options include borrowing direct from the markets, or issuing special drawing rights – the IMF’s own “currency” – to members, but officials say these are complex and time-consuming. So it is hard to imagine the fundraising that kind of money without tapping countries with huge reserves, such as China, Korea and Saudi Arabia.

But unlike Japan, emerging markets such as China seem reluctant to recycle more of their surpluses to deficit countries through the IMF without a bigger say over how the fund is run. Asked about increasing IMF contributions in a recent interview with the FT, Wen Jiabao, the Chinese premier, said that first "We should increase the voting share, the representation, and the say of developing countries”.

European and some IMF officials say the longer-term question of voting power is separate from the campaign to raise ad hoc contributions. But emerging market governments have been pushing the issue ahead of the Group of 20 summit of industrialised and developing nations in London in April.

After its latest bruising review of quotas, the IMF last year reached a fragile compromise that gave a little more power to those emerging markets, particularly in Asia, currently under-represented relative to their weight in the global economy and trade. But the deal still overweights the smaller European countries.

In the past, voluntary increases in contributions have proved an effective way for countries including Saudi Arabia to lay the groundwork for an increase in official quotas later. But Europeans may have to make prior commitments to a shift in voting power – at the very least accelerating the next discussion of IMF quotas from its planned date of 2013 to 2010 or 2011 – if they want to attract contributions.

Some question the whole obsession with recycling the official reserves of the surplus emerging markets to deficit countries’ governments. Jerome Booth, head of research at Ashmore Investment Management, notes that emerging markets requiring traditional balance of payments support are mainly confined to eastern Europe. Other emerging markets have used inflows to build up their reserves rather than running current account deficits. Some, such as Mexico, have been able to keep borrowing in the capital markets. East Asian governments recently upgraded the so-called Chiang Mai currency swap arrangements to create a common pool of foreign exchange reserves.

“Much of Asia and Latin America haven’t got the same credit crunch and deleveraging issues because they didn’t leverage up in the first place,” Mr Booth says. Fixing trade finance, he adds, should be tackled not by recycling money from government to government but by encouraging private lending, perhaps by relaxing regulatory constraints on banks lending to emerging market governments.

But with eastern Europe in particular being swept by confused alarms of struggle and flight, there seems little doubt that official institutions will have a big part to play in preventing capital market dramas turning into economic crises. And the gradual shrinking of those institutions over the years relative to the global markets is now becoming all too obvious.

- The Financial Times Limited 2009

 

 

The European 'Un-Union'

The increasing cries of European protectionism does not bode well for Eastern European countries - including that of Turkey. It is a disturbing attitude that I think threatens the very foundation of what the EU stands for. The wealthy governments simply cannot draw countries toward the EU only to leave them in the cold once a recession hits.

I'm guessing that short-term political maneuvering is (at least for now) outweighing long-term social and economic stability/union.

The economic leaders of the EU must remember that recessions are only temporary and things will eventually get better, however their neighbours/partners will not forget so easily.

This article is from the Wall Street Journal (Monday, March 2, 2009).

BRUSSELS -- European Union leaders, led by German Chancellor Angela Merkel, rejected a call by Hungary for a sweeping bailout of Eastern Europe, as the bloc struggled to find consensus on an approach to the spiraling financial crisis at a summit Sunday.

The global recession has greatly strained the bonds holding together the 27 nations that now make up the European Union, formed in the wake of World War II, and poses the most significant challenge in decades to its ideals of solidarity and common interest.

Ms. Merkel said she couldn't see the need for a broad grant of aid to Eastern Europe. "The situation is very different" in Europe's economies. "We cannot compare Slovakia nor Slovenia with Hungary," she told reporters.

Hungarian Prime Minister Ferenc Gyurcsany, who proposed a bailout package of up to €190 billion ($240.84 billion), warned that without aid a "new Iron Curtain" would descend on Europe and again separate East from West. Hungary has been battered by declining demand for its exports and a plummeting currency -- straining Hungarians who borrowed in euros to buy houses that have now sunk in value.

German Chancellor Angela Merkel holds a press conference at the end of an Economic summit of European leaders in Brussels.

The summit was originally called by Czech Prime Minister Mirek Topolanek to discuss concerns about rising protectionism in stimulus plans being proposed by individual nations. With the recent collapse of the government in Latvia, Eastern Europe's growing problems became the main focus. But leaders left Brussels with few concrete decisions and no indication that the richer EU states of Western Europe would be white knights for the East.

Consensus was hard to find even in Eastern Europe: leaders of relatively stronger countries -- fearful of appearing weak and being tarnished by international markets to which they need access for borrowing -- split with their neighbors over the wisdom of bailouts.

"Our position is that we must differentiate between countries that are in difficulties and those that are not," Polish Finance Minister Jacek Rostowski said. Poland, which benefited from years of healthy economic growth, is in better shape that some of its more-indebted neighbors. But it has seen a substantial fall in the value of its currency as investors scramble out of the region.

Hungary also proposed speeding up adoption of the euro -- now generally used by the Western European countries -- in the East.

Strict EU rules meant to maintain the euro's strength require that countries have strong fiscal positions before adopting the common currency. That has left out Eastern European nations grappling with budget deficits, inflation -- or both.

The fall of Iceland -- whose banks failed in part because Iceland's currency collapsed -- has reinvigorated calls by a number of countries to make it easier to join the safety and stability of the euro.

But both the bailout and calls for Eastern European countries to join the euro sooner were coolly received by Western European nations. Ms. Merkel and French President Nicolas Sarkozy both separately suggested that Eastern countries should look elsewhere -- to the International Monetary Fund, for instance -- for help.

Behind the tensions: The recession has struck the 27 EU nations with widely varying force. Large and steady economies such as Germany's are facing an inevitable slowdown, but smaller peripheral states such as Latvia, Bulgaria and even Ireland have been brutally whipsawed from an era of heady growth to shockingly fast decline.

The impact on Eastern Europe, which boomed in recent years, has been especially intense. Latvia, which financed its own expansion by borrowing from abroad, is literally running out of money as the credit crunch shuts those spigots off. Last week, Standard & Poor's cut Latvia's credit rating to junk.

And, as some in Eastern Europe warned, deep pain could well emerge elsewhere. All eyes are on Ireland, which is slashing public-sector pay as it scrambles to close a budget deficit that could reach nearly 10% of gross-domestic product. A protest last month in Dublin drew more than 100,000 people.

Other large countries, such as France and the U.K., face substantial domestic troubles and have little desire to persuade their populations to add the East's problems to their own.

The EU's disinclination to fund a regional bailout suggests that the IMF and other multilateral institutions will take on an even larger role in coming months -- a role that IMF officials have said they recognize. The IMF is looking to double its war chest for lending to $500 billion, and the EU is weighing whether or not to make a loan for that purpose. Last week, the World Bank, the European Bank for Reconstruction and Development and the European Investment Bank said they would provide €24.5 billion in financing for banks in Eastern Europe.

The IMF has been active on Europe's periphery: Iceland, Hungary, Latvia and Ukraine have turned to the agency for aid.

Most critical was the cold shoulder from Germany, which, as Europe's largest economy and the one with most access to borrowing, would play the largest role in financing any aid. Germany, the EU's strongest economy, is unwilling to unwind its own fiscal discipline to pay for the spending excesses of others. Admitting countries with weaker finances could hurt the strength of the euro or push up inflation across the euro zone.

At present, 16 of the 27 EU members use the euro. In Eastern Europe, only Slovakia and Slovenia do. To join, countries must keep budget deficits, government debt and inflation below specified ceilings. The recession has complicated some of those aims, particularly as some governments take on more debt. Another requirement calls for countries to hold their currencies within a preset range to the euro for two years.

That has wreaked havoc on euro-adoption plans in Hungary and Poland, where currencies have tumbled. Of the 11 EU members that don't use the euro, only Denmark could be reasonably close to adopting it. The misadventures of Iceland have provided an ample demonstration of the safety the euro offers in a storm. The North Atlantic island is not an EU member, though it shares many EU rules as part of the European Economic Area.

Iceland's three big banks -- virtually the country's entire banking system -- had expanded abroad by borrowing heavily in euros and sterling. When the credit crunch cut off their funding and the Icelandic krona fell precipitously, Iceland found itself without enough foreign currency to bail out the banks, a situation possibly avoidable if Iceland had used the euro. All three banks collapsed, and some on the island are pushing for quick accession to the EU.

Mr. Topolanek of the Czech Republic, whose country is among the strongest in Eastern Europe, said "the EU is going to leave no one in the lurch." Mr. Topolanek also said leaders had agreed to have further discussions about the EU rules for euro adoption, but that there was "broad agreement" that "it would be an error to change the rules of the game now."

The EU resolved one contentious issue on the eve of the summit: It approved France's much-criticized plan to give €6 billion in low-interest loans to domestic car makers. The French plan had drawn howls of protectionism -- particularly from the Czech Republic, where PSA Peugeot Citroen SA makes small cars -- since it made the aid contingent on the car makers keeping French factories open.

—Peppi Kiviniemi, Leos Rousek, Gabriele Parussini and Leila Abboud contributed to this article.