We recently received this interesting article that gives the facts and figures about the economic nightmare that is about to hit Eastern Europe. Twenty years after the disastrous collapse of Stalinism these countries now face an even bigger collapse, this time of the capitalist type.
Central and Eastern European (CEE) countries are generally regarded as one of the most affected regions of the world by the financial crisis and by what is becoming a full-blown economic recession. Dramatic reduction of direct foreign investments, capital flight from the region together with falling demand for their exports is threatening governments with rapid imbalances in payments resulting in insolvency and the very real prospect of defaulting on their debts.
Clashes with police in Latvia during a demonstration against the policy of cuts by the right wing government.
Ukraine has debts of $105 billion on the international credit markets, a huge amount for a country whose GDP is approximately $140 billion. The price of steel, which is its main export product, has fallen by 56 percent. Industrial production has collapsed by 27 percent.
All CEE countries have been hit by soaring government budget deficits and collapsing values of their currencies. In the first three months of this year, the currencies of CEE countries plummeted, the Czech Koruna by 12 percent, the Hungarian Forint by 19 percent, the Polish Zloty by 28 percent, and the Ukrainian Hrywnja by 30 percent. “I would love to say we’ve seen the bottom in these currencies but I’m not sure we’re there yet,” said Papasavvas, head of foreign exchange in London at Investec, who helps manage more than $4billion of currency assets. “I certainly don’t want to buy here.” Further declines may also weaken the euro because of concerned banks in the 16-member euro zone will be forced to write off some of their $1.3trillion of loans to the region, according to an ING Groep NV report last month.
Despite the Czech economy being widely considered as being among the best positioned of all the CEE states to weather the economic crisis, Deutsche Bank AG estimates in its late March analysis that the Czech economy will shrink by 3.4 percent. Only two months ago similar predictions were claiming that the Czech economy would grow by some 2 percent.
Political implications and popular discontent never lag far behind the worsening economy. One of the first governments which was forced to step down due to pressure from below was in Lithuania in February, after angry protests against austerity measures in the capital Riga. By the end of March prime minister of Hungary Ferenc Gyurcsany announced his resignation in the face of a very similar situation, with his attempt to implement cuts in public services and wages. Strong protests and strikes prevented the government from pushing the bills through parliament. Hungary has a very high level of foreign public debt - 60 percent of GDP.
Western banks have invested in Central and Eastern European countries $1500 billion. The economic recession resulting from rapidly falling demand for products of these heavily export oriented economies has torn away the thin veil of a pretence of coming prosperity after a long period of declining living standards and painfully slow growth. Since the fall of the Stalinist regimes of the former Eastern Bloc countries, this region has become an almost exclusive playing field for West European capital, over the last two decades. The financial crisis has revealed that some of the Western countries like Austria, Italy, Sweden, France and Greece are particularly affected by heavily investing and lending to Central and Eastern European countries. In the most vulnerable position are Austria’s banks (Erste Bank, Raiffeisen International) which lent to 224 billion Euros CEE countries, the equivalent of 78 percent of Austrian GDP!
Realising the potential fallout of any country defaulting on its debts in the present-day interconnected globalised world has brought back and reinforced the positions of financial institutions such as the IMF and the World Bank. On Friday 20th March the EU meeting in Brussels decided they would provide up to 75bn euros ($102bn; £71bn) in loans in an effort to boost the IMF's capital to $500bn (£344bn). After the G20 summit in London on 2nd April the IMF was pledged to receive a further top up which will amount to 1 trillion dollars. A stark twist from the recent past when the IMF was, as Bloomberg Press pointed, often “dismissed as increasingly irrelevant when the world economy was booming.”
Recent IMF emergency loans are the following: Hungary$25 billion, Ukraine $16.5 billion, Latvia 7,5 billion Euros, Romania 19 billion Euros, Iceland($2.4 billion). Whole Poland is currently in talks with the IMF
A report by Capital Economics claims that all Eastern European countries are about to experience a "shock therapy" that at least matches the economic devastation that took place two decades ago following the collapse of Stalinism. Capital Economics expects industrial output to fall this year by 5 percent in the Czech Republic and Russia, 7.5 percent in Hungary and Romania, 10 percent in Estonia and Ukraine, and a staggering 15 percent in Latvia and Lithuania.
There is a deeply rooted fear of any struggling Eastern European country defaulting. That could, as some financial analysts say, trigger even more devastating events as those which resulted from the US sub-prime securitisation collapse.