Polonia mon amour

Posted by Edward Lucas, Oct 23rd 2008, From The Economist print edition
three-page briefing on CEE economics
Eastern Europe. Who’s next?
The economies of eastern Europe face stormy times, even if Western banks hold their nerve. The political fallout may be even worse
WILL an ex-communist country be the next Iceland? The dramatic collapse of that country’s economy, endangering savings from hapless depositors in Britain and elsewhere, has highlighted other risky but obscure corners of the world’s financial system. The stability of the Ukrainian hryvnia, the implications of the Latvian property crash and Hungarians’ troubling penchant for loans in Swiss francs are among the exotic topics now crowding policymakers’ desks. Countries such as the ex-communist ones in eastern Europe are particularly at risk during periods of financial turmoil. First, because the counterpart of soaring foreign investment has been gaping current-account deficits (Latvia’s, for example, peaked at 26% of GDP in the third quarter of last year). Second, their central banks and governments are unlikely to be able to muster the financial firepower now being deployed in the big economies of the West. Already a couple of banks have toppled; stockmarkets have plunged, wiping out years of savings and hitting balance-sheets. The price of credit-default swaps—the market’s estimation of a borrower’s creditworthiness—ranges from the reassuring to the alarming (see map). As worries intensified, Hungary’s central bank on October 22nd raised interest rates from 8.5% to 11.5%.

For countries that have benefited from big flows of outside money, delivered by a highly leveraged global financial system, the mix of problems looks scary. Those big current-account deficits in every country save Russia suggest they may be living beyond their means. Some (but not all) have public or private sectors with big foreign debts; these may be hard to refinance. Some (again, not always the same ones) have wobbly banks and large state deficits. At best, the region is in for more nasty shocks that will need external support from lenders such as the IMF. At worst, some countries face debt restructuring, currency collapse and depression; that raises the spectre of political upheaval, too.
The turmoil has been most spectacular in Russia. There the stockmarket has plunged by some two-thirds since its peak in May, sending its fabled oligarchs scrambling to liquidate their portfolios to meet bankers’ demands. Oleg Deripaska, probably the richest of these well-connected tycoons—now embroiled in a British political scandal (see article)—has sold prized stakes in Western companies which he had pledged as collateral in the $4.5 billion acquisition of a 25% stake in Russia’s biggest metals producer, Norilsk Nickel.
These wild shifts in fortunes reawaken memories of the 1998 financial crash, in which default and devaluation wiped out most of Russia’s private banking system. But few expect a reprise. Thanks to $1.3 trillion in oil and gas revenues over the past eight years, Russia now sits on a mighty pile of cash and liquid assets, still in excess of $500 billion, in its foreign-exchange reserves and other funds. It is unclear how well the Kremlin will organise the bail-outs and who will benefit. A lower oil price may affect the geopolitical ambitions of Russia and its allies (see article). Some oligarchs may become minigarchs. But Russia will not need to beg for cash from the outside world.
In Ukraine, the next-largest country in the region, the story is quite different. The stockmarket has plunged by nearly 80% this year. The hryvnia, the national currency, recently hit a seven-year low against the dollar. The sixth-largest bank, Prominvest, suffered a run. Rating agencies have issued downgrades. Economic growth is plunging. Inflation is 25%.
The outside world wants to help. Officials are haggling with the IMF about an emergency loan of up to $14 billion—around a fifth of the $55 billion-66 billion that Ukraine needs to raise by next year to roll over short-term loans, pay interest on other debts and finance the rest of its current-account deficit. That would normally require hard bargaining about banking reform, higher interest rates and a stringent public-spending regime to curb inflation.
The problem is that Ukraine, even by its own awful standards, is in political chaos. The prime minister and president are at loggerheads about whether an impending general election (now postponed until December 14th) is legal. A new government able to take tough decisions will not be in the saddle for weeks, even months. Keen not to be seen as too slow to assist, the IMF may stump up a loan nonetheless.
The IMF is one source of help (and may be happy to have something to do after years in which its role in the region seemed to be shrinking). For countries closer to “old Europe”, another possible provider of assistance is the European Central Bank. On October 16th the ECB provided a short-term credit line of €5 billion ($6.7 billion) to Hungary, which is not in the euro zone but has an economy closely linked to it. The foreign-exchange market there had all but seized up amid worries about debts, public finances and growth prospects. Although much richer than Ukraine, with GDP per head roughly three times as high, Hungary is in some senses even more vulnerable. Public debt is more than 60% of GDP (a lot by the region’s standards), thanks to a communist-era borrowing spree and spendthrift governments since then. In 2006 the budget deficit exceeded 9% of national income. The current-account deficit this year amounts to €6.8 billion, or 5.5 % of GDP. Recent debt auctions have been cancelled because of a buyers’ strike. Many Hungarian households and firms have taken out hard-currency loans (such loans, originally at much lower interest rates than forint-denominated ones, account for 90% of new mortgages since 2006 and 20% of GDP). In effect these were personal bets, now looking ill-judged, on the convergence of the forint with the euro. The weak forint already means higher interest payments; if that trend continues, many Hungarians risk bankruptcy.
Hungary’s economy could certainly be in better shape. But outsiders give the authorities credit for efforts in the past two years to cut the budget deficit, now slightly less than 4% of GDP. The government has started cross-party talks on a further austerity programme. The Hungarian central bank is impressively well-run. The IMF and ECB are ready to lend more if needed.
The huge question, in Hungary and elsewhere, is whether foreign banks will stand by their local customers. Like most of the new members of the European Union, Hungary has sold off most of its banks to outsiders. That once looked the best way to create a solid financial system, allowing countries to borrow freely and grow fast, without risking the kind of crisis suffered by emerging markets in past decades. In retrospect, it looks risky. For the past decade Western banks, such as Erste Bank and Raiffeisen (Austria), UniCredit (Italy) or Swedbank and SEB (Sweden), have piled in to the promising new markets on their doorsteps, lending boldly and buying up sometimes richly priced local banks. Now those huge loan books—in Austria’s case fully 43% of GDP, compared with 5% for Italy and 1% for Sweden—are souring at a time when wobbly banks may feel that scarce cash is better deployed at home. Such deposits abroad are not covered by home-country insurance. The foreign banks are already reining back lending, refusing to issue mortgages in foreign currency and demanding better security. That is prudent, if belated. The danger is that they may go much further, cutting off new lending or refusing to roll over outstanding loans, even to solid borrowers. That could send bankruptcies and unemployment rocketing. Another possibility is that one or more parent banks will put a troubled subsidiary up for sale, perhaps to a Russian buyer. That prospect is unlikely. But it sets nerves jangling in places such as the Baltic states.
At first sight it is these economies that seem in the riskiest position. A sharp slowdown had started even before the global financial crash. Estonia and Latvia in particular had enjoyed remarkable property booms, generously financed by bank lending. That was one factor in their colossal current-account deficits. The bubbles have popped; growth, running in double digits in 2006, has come to a halt.
This has been a hard but so far orderly landing. Whether it now turns catastrophic is an open question. The debts must still be repaid. Fitch, a rating agency, which downgraded all three Baltic countries this month, reckons their gross external financing requirements next year (the money they need for foreign debt repayments and their current-account deficits) are 400% of likely year-end foreign-exchange reserves in Latvia, 350% in Estonia and 250% in Lithuania. These are the highest ratios in emerging Europe.
In theory, the external imbalances should unwind of their own accord. The slowdown at home is already shrinking current-account deficits. If the local banks run out of money because of bad loans, their foreign owners will send them more cash; the sums involved are big by Baltic standards, but small by the standards of rich-country banks. Swedbank, for example, has 16% of its loans in the Baltic states, (190 billion Swedish kronor, equivalent to $32 billion or €20 billion). Only 1.2% of the total look bad so far, the bank says. Sweden’s regulators say the biggest banks can write off as much as 10% of Baltic lending without eroding their own capital. Sweden launched a $200 billion bail-out plan this week to bolster confidence.
Furthermore, despite the ballooning foreign borrowings of firms and households, none of the Baltic states has much public debt to worry about (Estonia even has net assets). Public finances are solid. The governments still have investment-grade credit ratings.
The problem is not so much survival, as finding the right policy mix to minimise the effects of sharp slowdown. All three Baltic states have their currencies pegged to the euro, either in formal currency boards (where the amount of money in circulation is directly linked to foreign-exchange reserves) or, in Latvia’s case, in a similar but slightly more flexible arrangement. That was a shrewd move in the 1990s, when it helped to stabilise economies left prostrate after the collapse of Soviet planning, and was a good way of keeping on track for eventual membership of the euro (something Lithuania missed by a statistical whisker in 2006). It is made safer by the fact that none of the countries is a financial centre: shorting the Icelandic krona was child’s play compared with the difficulties of speculating in the thinly traded Latvian lat or the Estonian kroon.
The main disadvantage of the arrangement is that it limits policymakers’ flexibility. If outsiders suddenly pull money out of a country with a pegged currency, the money supply shrinks, risking a deep depression. A country with a floating exchange rate can try to restore competitiveness and stoke growth by devaluing the currency. For any of the Baltic states, a float would be a catastrophic humiliation. It would also not necessarily help matters: for small countries, the risks of a free-floating currency are greater and the benefits less. So the likelihood is that the three Baltic countries face, at best, big cuts in public spending and lower output, perhaps for several years, while they pay off their debts and regain competitiveness. In happier conditions the governments would run deficits to counter this. In the current gloom, more borrowing risks making outside lenders feel even twitchier.
Most of the EU’s new members are in a stronger position, and should scarcely be put in the same category as the problematic countries. Poland, for example, has public debt of around 40% of GDP, while growth is nearly 6% and inflation at 4.5%. A strong economy has meant healthy tax revenues and kept budget deficits down. The zloty, like the Hungarian forint, has been wobbly, and a sharp slowdown in western Europe, the biggest export market for all ex-communist countries, will affect Poland too. But life should be at worst a bit tougher, rather than downright nasty.
Potentially more vulnerable are the poorest new members of the EU, Romania and Bulgaria. For now, growth in both countries remains strong. But the imbalances are striking: Bulgaria’s current-account deficit is likely to be 24% this year. Bursting property bubbles and a wave of corporate bankruptcies could expose the poor quality of banks’ loan books. The question then will be how much support and attention either country will receive from outside. Whereas the Baltic states are well-regarded, enthusiasm in the EU for a Bulgarian bail-out is likely to be limited, thanks to the failure of the authorities in Sofia to fulfil commitments to clean up organised crime and corruption.
And that is the deeper problem for eastern Europe: not so much financial wobbles and weaknesses, but corrupt and incompetent politics. Their leaders found it hard enough to govern efficiently even when times were good. What will happen when foreign investors are stingier and growth slows or stops?
Ever since the collapse of communism in 1989, the eastern half of Europe has been struggling to reach the levels of economic, social and cultural development of the west. The ruinous legacy of one-party rule and planned economies was daunting. Everything from the rule of law to competitive companies needed to be rebuilt (in the case of the central European countries) or constructed from scratch (for those whose pre-communist experience was of autocracy or feudalism).
The results were impressive. Living standards soared; foreign investment poured in; politics settled down. The richest ex-communist countries are now nearing “Western” countries such as Greece and Portugal. So the fears of some in “old Europe” in the early 1990s that the new neighbours were likely to be poverty-stricken and unstable, exporting hungry migrants and crime to the rest of the continent, looked ridiculously overblown. Expanding the EU and NATO eastward went from a preposterous fantasy to common sense. One small ex-communist country, Slovenia, has joined the euro; another, Slovakia, will do so in January.
The next few years are likely to be a lot harder. A sharp recession will expose the cost of stalled reforms in previous years. In most of the ex-communist countries, the effort to meet EU and NATO requirements was a high-water mark in terms of political commitment to good government and sound economic policies. Since then, the approach has been to sit back and enjoy the weather: low borrowing costs, high foreign investment, rising tax revenues and higher living standards. Voters may not have thanked governments for this, but the political pressure to take painful decisions has been minimal. (The only real exception has been Hungary, where capital markets sent a sharp warning two years ago.)
Now more than ever, the countries of the region need to push ahead with tough but urgent policies such as public-finance reform, especially of pensions; raising labour-market participation, particularly by reducing the numbers of early retirees; and improving productivity by modernising education, which is often still hidebound by communist-era bureaucracy. Countries such as Poland and Latvia still have shamefully bad road systems. Officialdom chokes business; corruption is stubbornly entrenched.
But the chances of a big push on reform look slim. The political compass, which once sent a reliable, if often ignored, message about the needed direction of policy, is swinging wildly as Western governments break taboo after taboo in the hope of fending off financial meltdown. For countries that have been told that privatisation, liberalisation and balanced budgets are the sure path to salvation, these are confusing times. The result, says Ivan Krastev, a Sofia-based pundit, is “an implosion in the idea of normality”.
The wrong kind of certainty may be even worse than confusion. The political institutions of the ex-communist countries were created in the great flush of optimism that followed the collapse of the one-party state. But voters have grown steadily disillusioned with politics. A seasoned watcher of the region in Brussels says that the coming years “will be a big test of democracy and the rule of law…will they stick to the rules?” If things get nasty, blaming economic hardship on foreign banks that have taken deposits but don’t want to make loans may prove a tempting theme for ambitious populist politicians.
For countries still outside the main clubs, prospects are even bleaker. The chances of fragile countries such as Macedonia joining the EU any time soon are diminishing. So are the prospects for the more advanced countries that want to join the euro. A cash-strapped EU may think again about the money it is prepared to spend on infrastructure and public services in neighbouring non-members.
In the eyes of many it is market economics, even more than democracy, that has been the big success of the past 20 years. It has brought undreamed-of freedom, choice and prosperity. In some countries, Mr Krastev notes, foreign banks have scored more highly in trust rankings than any public institution. They have become the symbolic and financial linchpins not just of economies, but of whole countries. They have a lot to lose. So does Europe. 
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Europa ratuje Węgry
Dominika Pszczółkowska, Bruksela, Gazeta Wyborcza 2008-10-30
Bruksela do Europy Środkowej: Albo będziemy razem płynąć, albo razem utoniemy
Unia Europejska zaciągnie 6,5 mld euro pożyczki, by ratować pogrążone w kryzysie Węgry.
- Albo będziemy razem płynąć, albo razem utoniemy. Niektóre wschodzące gospodarki jakiś czas temu sądziły, że uda im się uniknąć kryzysu. Jest już jasne, że nie – mówił wczoraj przewodniczący Komisji Europejskiej José Manuel Barroso, obiecując unijne wsparcie dla krajów w potrzebie.
Pierwsi skorzystają z pomocy Węgrzy, wyjątkowo boleśnie dotknięci przez światowy kryzys finansowy. Otrzymają pożyczkę od trzech instytucji: Międzynarodowego Funduszu Walutowego (12,5 mld euro), Banku Światowego (1 mld euro) i Unii Europejskiej (6,5 mld euro).
Dwie pierwsze instytucje z definicji pomagają krajom w kłopotach. Dla Unii to wyjątkowy krok. Dotąd tylko raz to zrobiła. W 1993 r. wsparła finansowo Włochy, ułatwiając im wejście do strefy euro.
Teraz na opiekę Komisji mogą liczyć także kraje nienależące do strefy euro, czyli przede wszystkim z Europy Środkowej (poza nimi do strefy nie należą tylko Wielka Brytania, Dania i Szwecja).
- Jesteśmy gotowi udzielić krótkoterminowej pomocy państwom, które będą miały kłopoty z bilansem płatniczym – zapewnia komisarz ds. ekonomicznych i walutowych Joaquin Almunia.
Unia nie może przeznaczać na pomoc pieniędzy ze swojego budżetu ani brać ich od krajów członkowskich. Chce je pożyczać na międzynarodowym rynku finansowym, emitując obligacje. W ten sposób zdobędzie fundusze dla Węgrów. Unia ma wysoką wiarygodność kredytową i pożyczyć może taniej niż zadłużony po uszy Budapeszt. Węgrzy dostaną zaś od niej pożyczkę na niski procent i bez żadnych dodatkowych opłat. Ich rząd będzie musiał jednak spełnić warunki Komisji Europejskiej, np. zmniejszyć deficyt budżetowy. Szczegółowe negocjacje z Węgrami jeszcze trwają.
Na razie po pomoc do Komisji nie zgłosił się żaden inny kraj UE (zabiega o to tylko nienależąca do Unii Islandia). W europejskich mediach pojawiły się jednak doniesienia, że pomocy za granicą szuka też Rumunia.
Komisja zapowiedziała wczoraj, że wystąpi do krajów członkowskich, by zgodziły się zwiększyć fundusz pomocowy dla zagrożonych państw. Teraz przepisy pozwalają jej zebrać najwyżej 12 mld euro, chciałaby dysponować kwotą do 25 mld euro.
Wiele wskazuje, że to się da załatwić. Pomysł już wcześniej poparł francuski prezydent Nicolas Sarkozy, przewodniczący w tym półroczu Unii, po wtorkowym spotkaniu z brytyjskim premierem Gordonem Brownem. – Naszym priorytetem jest zrobienie wszystkiego, by wirus nie rozprzestrzeniał się na kolejne kraje, w tym Europę Środkowo-Wschodnią – zgodził się z nim Brytyjczyk.
W środę Komisja Europejska ogłosiła też, że będzie szukała sposobów, by złagodzić kryzys gospodarczy w całej Unii. – Musimy ograniczyć bezrobocie do absolutnego minimum i pomóc tym, którzy stracą pracę – mówił José Manuel Barroso. Chce m.in. dać więcej środków Europejskiemu Bankowi Inwestycyjnemu, który udziela pożyczek np. na inwestycje infrastrukturalne. Szczegóły planu będą znane dopiero pod koniec listopada.
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Polonia/ Crisi finanziaria globale fa salire la febbre. L’economia tiene. Resta "propensione al rischio"di sistema bancario
Roma, 30 ott. (Apcom-Nuova Europa) – Per ora, l’economia polacca ha retto il colpo, con tassi di crescita del Pil stimati per il 2008 intorno al 5,5% e il livello dei senza lavoro in costante diminuzione. A risentire della crisi semmai è stato lo zloty, la valuta nazionale, che ha subito una forte svalutazione su dollaro e euro. Ciò detto, però, tutti gli analisti sono concordi nell’escludere il ripetersi in Polonia della crisi vista in Ungheria e Ucraina. Per evitare comunque qualsiasi rischio, la Banca centrale si è assicurata un prestito in valuta svizzera. Una buona parte dei polacchi infatti ha sottoscritto un mutuo immobiliare in franchi, contando su un tasso d’interesse più basso rispetto a quelli nella valuta nazionale. Ma la svalutazione dello zloty – provocata dalla crisi finanziaria – ha messo in difficoltà alcune banche e molti cittadini polacchi. "Al momento la nostra economia è in buone condizioni. La produzione industriale all’estero cala, da noi sale. La disoccupazione nel resto d’Europa tende ad aumentare, da noi diminuisce. Anche i consumi e la vendita al dettaglio non hanno subito frenate. La nostra economia è stabile e forte, resistente alla crisi finanziaria", spiega Filar, che assicura: "la crisi di liquidità in Polonia in generale non c’è. Pur in una congiuntura mondiale difficile, il Pil polacco per il 2009 non dovrebbe scendere sotto la soglia del 3,8%". Unico punto interrogativo per il prossimo futuro resta, per Grabowski, la propensione al rischio del sistema bancario polacco. In altre parole, se le banche continueranno in questa delicata congiuntura a prestare soldi al sistema economico, nonostante l’accresciuto livello di rischio. "Per il 2008, il Pil dovrebbe crescere al 5,5%. Nel 2009, tra il 3,5 e il 4%. Ma resta da vedere se le banche continueranno a finanziare il sistema economico", sottolinea. "Rispetto a qualche mese fa, è già assai più difficile ottenere prestiti dalle banche. Comunque – conclude Grabowaski – al momento non ci sono indicatori che lasciano pensare che il sistema bancario polacco possa collassare".
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Eastern Europe’s woes. Stopping the rot
Edward Lucas, From The Economist print edition, Nov 27th 2008
East European economies crack, with Romania and Bulgaria the worst off
JUST another week’s news in eastern Europe: Latvia, after vehement denials, starts talks with the IMF; Bulgaria loses €220m ($286m) in promised payments from the European Union because of its failure to tackle corruption; and the European Bank for Reconstruction and Development cuts its growth forecast for the region by half. But the good news is that worries of a huge meltdown, from the Baltic to the Black Sea, now look overblown.
The most likely outcome is several years of low or no growth, with bigger hiccups in countries that have the shakiest financial systems and biggest imbalances. The outside world (ie, the IMF, the EU and the European Central Bank) is ready to help when necessary and—more usefully—even before problems hit markets. The ECB has opened a €10 billion credit line to Poland, which saw its currency, the zloty, fall sharply earlier this month. Hungary’s central bank was even able to cut its interest rates by half a point from the 11.5% rate that it set last month, as part of a $25 billion international bail-out. And foreign banks have stood by their subsidiaries in the ex-communist countries. It was their risky lending that inflated the property bubbles, now popped, and also financed huge current-account deficits in such places as Latvia and Bulgaria.
The biggest worries are now focused on Bulgaria and Romania, the poorest and worst-governed new members of the EU. The Bulgarians have