UPDATED - Financial Crisis Spreads To Eastern Europe

Saturday, October 18, 2008

East Europe has a sudden awakening these days. After a decade long shopping spree mainly focused on cars and home improvements consumers in the Baltic and Balkan countries are tripping over loan payments and sustaining inflation. Edward Hugh's blog Global Economy Matters leads the blogging pack with an unsurpassed depth of information on Hungary's economic situation as the country is sucked into the global credit crisis.
Attributing the crisis to the usual wrongdoings of politicians like running up fiscal and current account deficits Hugh highlights the country's fragile exposure to foreign currency mortgages which rose by some 50% since 2007. As if that were not enough for a country whose trade partners are slipping into recession too, Hungarians have also more than tripled their outstanding Forint-denominated loans since 2006.
Hungary was thrown a €5 billion lifeline by the ECB last Thursday to prevent a currency crisis and is in talks with the IMF about a rescue.
Foreign banks in Hungary stopped or scaled back forex lending earlier this week, reports Hugh:
Oesterreichische Volksbanken AG's Hungarian unit suspended Swiss Franc and U.S. dollar loans in Hungary on Wednesday. The bank, which has declined to elaborate to the local press on its decision, will continue to lend euros it says. Swiss Francs are however the key currency in the Hungarian context, since around 80% of new mortgage lending has been in CHF. Bayerische Landesbank local subsidiary MKB was the first bank in Hungary this week to announce (on Tuesday) the suspension of new foreign-currency personal loans, saying the volatility of the forint made them too risky for clients. One by one the other banks in the market have all been following suit.
Hugh points to one more interesting nuance in Hungary's crisis. A majority of loans granted in the past year were forex denominated and Hungarian debtors are now in for a revaluation shock.
BTW, Austria's debtors face the same problem. Swiss Franc loans were aggressively marketed in the past years and now the hard Swissie will erase all interest rate gains made earlier, resulting in higher payments.
Suddenly The IMF is en vogue Again
Being not able to withstand the crisis with domestic means, the International Monetary Fund is getting a lot of calls from the troubled East European Countries. Check out Hughs post on the Ukraine's troubles here. As in so many bear market stories, the crisis was not noted until a day before.
Even as late as yesterday central bank Governor Volodymyr Stelmakh had been saying IMF help wasn't needed. The banking system is "normal and reliable,'' he said in an interview.
Providing a blog for most European regions, Hugh features Claus Vistesen at his Baltic Economy Watch who reports about economic contraction and a downgrading of sovereign debt in Estonia, Latvia and Lithuania.
The core problem is, again and again, credit-funded consumption:
Head of sovereigns in Europe Edward Parker from Fitch consequently noted that the worse than expected correction in financial markets coupled with the vulnerable macroeconomic enviroment as the main reasons for the downgrade. More specifically, the mixture of external deficits funded to a large extent by inflows of credit (e.g. some 30% for Lithuania) supplied by foreign banks lies at the root of the decision and incidentally, as it were, also at the root of the macroeconomic vulnerabilities of the Baltic economies.
All three countries are pounding the doors of the IMF, following Hungary and Iceland, reported Hugh in a post from last Tuesday.
Not Much Hope in Romania
Romania Economy Watch paints a bleak picture too. Producer prices rise around 20% and wages by 25% YOY. Combine this with a real estate market gone wild - condos in Bucarest cost more than in Vienna - and you get the picture that Romania won't escape the global credit crunch.
Czech Shares Plunge To 4-Year Low
The Czech Republic begins to feel the strain on Eastern Europe as well, reports Czech Republic Economy Watch. The stock market plunged to a four-year low on Friday, reflecting growing fears that the Czech banking sector may be set for a shakeout.
An index of investors' and analysts' expectations for the CEE region over the next six months plunged to minus 51.1 points in October from minus 30.6 in September according to latest the survey from the ZEW Center for European Economic Research and Erste Bank AG.
Goldman reduced the Czech Republic's 2008 growth forecast to 4.3 percent this year from 4.4 percent, while the 2009 outlook was changed to 2.5 percent from 3.8 percent.
Komercni Banka AS, the third-largest Czech bank, fell the most since 1999. OTP Nyrt. slid to its lowest level in almost five years after HSBC Holdings Plc downgraded Hungary's largest bank on concern its loan expansion may slow and credit quality worsen, while Bank Pekao SA, Poland's biggest bank, posted its steepest drop on record.
Komercni lost 530 koruna, or 17 percent, to 2,510 in Prague trading.
Austria Will Be Hit Hard By East Europe's Downturn
The downturn in East Europe has already hit my home country, Austria. The Austrian ATX has declined roughly 60% from its peak as all the "Ostfantasie" (East fantasy) has suddenly turned into a live horror scenario for Austrian banks that have scouted the Balkans since the end of Communism in 1990.
This financial recolonization may backfire now as we find out that all that expansion was built on a base made from rapidly expanding credit that did not correspond with the economic strength of these countries where wages have not caught up with the latest bouts of monetary inflation.
UPDATE: Bloomberg has several stories on the East European credit crunch that do not exactly instill hope. Arguing that Russia's de facto chief Vladimir Putin may use the credit crunch to dethrone the oligarchs certainly makes sense. Read more about Russia's credit crunch and its results in this New York Times piece.
Bloomberg was also quick with a follow-up on fading hopes for a near-term solution in the Hungarian crisis, reporting a clash between government and opposition. The NYT explains what it all means to the average Hungarian.


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