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Wednesday, March 4, 2009

How Not To Manage Eastern Europe's Financial Crisis (Part 1)

"Saying that the situation is the same for all central and eastern European states, I don't see that......you cannot compare the dire situation in Hungary with that of other countries."
Angela Merkel, Brussels, Sunday

"Happy families are all alike; every unhappy family is unhappy in its own way"

In Europe, leaders rejected pleas for a comprehensive rescue plan for troubled East European economies, promising instead to provide “case-by-case” support. That means a slow dribble of funds, with no chance of reversing the downward spiral.
Paul Krugman

Bank regulators from Bulgaria, the Czech Republic, Poland, Romania and Slovakia met today and issued a joint statement, ostensibly to reduce the some of the impact of what they term "alarmist comments" from the Austrian government about how the regional banking system is now in such a precarious state that it requires urgent action at EU level to prevent meltdown. The Austrian government are, of course, concerned about the impact of any meltdown on their own banking system. The result of this "reassuring statement" can be seen in the chart below (10 years, HUF vs Euro).

Within minutes of the joint statement Hungary's currency plummeted to an all-time low against the euro and to a 6.5-yr low versus the US dollar. In fact the HUF rapidly depreciated to 312 per euro from 307.50 before climbing back in later trading to 310. And the reason for this swift reaction? Hungary was not invited to join the statement. As the forint plunged, Hungary 's banking regulator hurriedly signed up to the statement, blaming the original omission on a communications mess-up, but the damage was already done.

“Each of the CEE Member States has its own specific economic and financial situation and these countries do not constitute a homogenous region. It is thus important first to distinguish between the EU Member States and the non-EU countries and also to clarify issues specific to particular countries or particular banking groups."

Well this just takes us back to Tolstoy, each of them have their own specific problems, but the underlying reality is that they all face problems, and are vulnerable, each in their own way.

Hungary's economic fundamentals are clearly much weaker than those to be found in the Czech Republic and Poland as things stand, but what about Bulgaria and Romania? And the Czech Republic and Poland are about to have a pretty hard time of it as a result of their export dependence on the West, and Poland has the unwinding of the zloty options scandal still to hit the front pages. So there is plenty of food for thought here before throwing Hungary to the wolves. A default in Hungary could very easily lead to contagion elsewhere, and then the impact in the West is very hard to foresee. We should not be playing round with lighted matches right next to our fireworks stock. "Hey, it's dark in here" and then "boom".

Yesterday it was Latvia's turn, and the cost of protecting against a Latvian default (Latvia is the first European Union member priced at so- called distressed levels) rose to a record following the announcement that the unemployement level rose from 8.3% in December to 9.5% in January, the highest level in nearly nine years. In fact credit-default swaps linked to Latvia increased nine basis points to an all-time high of 1,109 basis points, according to CMA Datavision in London. The cost is above the 1,000 level, breached last week, that investors consider distressed, and is now about 270 basis points above contracts linked to Lithuania, the next-highest EU member.

So two countries are being systematically detached here - Latvia and Hungary - and statements by EU leaders are unwittingly aiding and abetting the process. But we should all remember, after they have eaten Latvia and Hungary for breakfast, the financial markets will undoubtedly chew on other luckless countries over lunch (Romania's Q4 GDP data was out today, and it was a shocker, and S&P have already said they are "closely monitoring" the situation), before perhaps moving on to bigger game for supper.

And we should remember here, no one is too big to fall, and I have already been warning about the gravity of Germany's situation, with a rapidly ageing population, a hefty bank bailout of its own to swallow, and total export dependence for GDP growth. Final data from Markit economics out today showed that Germany's composite PMI fell to 36.3 in February from 38.0 in January. That was the lowest level registered since the series began in January 1998. And it means that the German economy - which is highly interlocked with the whole of Eastern Europe (Austria holds the finance and Germany the industrial exposure) - is certainly contracting more rapidly in the first quarter of this year than it was in the last quarter of 2008, and may well contract in whole year 2009 by something in the order of 5%. So maybe someone over there in Germany should be reading the poem you will see below aloud to "our Angela" right now (Oh, and if you don't speak German, you can find a translation here).

Als die Nazis die Kommunisten holten,
habe ich geschwiegen;
ich war ja kein Kommunist.
Als sie die Sozialdemokraten einsperrten,
habe ich geschwiegen;
ich war ja kein Sozialdemokrat.

Als sie die Gewerkschafter holten,
habe ich nicht protestiert;
ich war ja kein Gewerkschafter.

Als sie die Juden holten,
habe ich geschwiegen;
ich war ja kein Jude.

Als sie mich holten,
gab es keinen mehr, der protestieren konnte.


Anonymous said...

I am a German from the Baltic States and it is "absolute" cheek here to use a poem of the time of the national socialism in here!!!!! cheek!!!! at all
Germany has its interests, and every state also has this in Europe. The wrong policy of the eastern states and particularly from Latvia should not be fired please with nationalism against other lands. In the foreign affairs I pursue for a long time the Rusofobia in the East European lands and now a Germofobia?

Anonymous said...


Edward Hugh said...

Hello there,

"I am a German from the Baltic States and it is "absolute" cheek here to use a poem of the time of the national socialism in here!!!!! cheek!!!!"

I think you are being far too sensitive, and misunderstanding my meaning. This poem was written by a German, with a proud historic tradition.

What it is saying is that if we all stand separately, then we will be taken down one by one. Europe faces a major crisis, we are at the centre of the global turmoil, and we all need to stand together, and not say, it's OK, let's let Hungary go, it's Ok let's let Latvia go, etc.

Because in the end the main one who will suffer is Germany, and I worry about Germany too. When Germany looks for support and everyone else has been allowed to default, or whatever. I don't think there is anything anti German in that, in fact it is in the tradition of Goethe and von Humboldt.

Anonymous said...

these lines are done exclusively against dictatorships. They act as a warning to every person and dictatorship on the ground.... These lines are not suited for an economic solidarity . they are too strong!! . the request of you is clear ... I do not share your opinion, however, understand your idea of solidarity.

however, even if we will lose all jobs.... starving and no money... we`r not going to be physically, emotionally and historically destroyed. And "just" against such "Cannibal" these very very strong lines are directed

Thanx for understanding

Edward Hugh said...


"these lines are done exclusively against dictatorships."

Well look, I completely respect your feelings, and I am sorry if I offended them.

"however, even if we will lose all jobs.... starving and no money.."

Well I hope it isn't going to come to that, but still, Latvia is already a poor country and is about to get a lot poorer.

These situations are then the breeding ground for all kinds of thing we wouldn't like to think about. In the 1930s fascism grew on the backs of massive economic deprivation. Of course we all hope that nothing like this will happen again, and I emphasise, this was never my intention.

I simply wanted to stress that Angela was making a mistake in singling out Latvia and Hungary, becuase tomorrow they would be singling out Austria (which they are) and then the day after, who knows, they might single out Germany.

I wasn't even trying to compare speculators with nazis, which is the objection I thought I might find. People ask me, who is the "they" in all this, and I answer the they is "us", people like you and me, who pay money into pension funds and other such things, and want a return.

The problem is that the economic crisis turns speculation into the most profitable business activity, and what we need from our leaders are measures which once more turn job creating investments into profitable activities and then we can all move forward, in Latvia, in Germany and in Spain (where I happen to be).

This is what I am asking for from our leaders. And if we don't get these measures, and the euro does fall apart, why then, 10 or 20 years from now we may see the kinds of radical movement emerging which so worry you.

Thanks for your understanding, and good luck.

A said...

Just read in diena.lv that there is an idea to increase social tax in Latvia. Because otherwise we willl need to decrease pensions.

Great nrews...

A said...

Another "good" news.

Latvia's Industrial output is down by 23,9% in January.

A said...

Btw, Latvia's next Minister of Finance Einars Repse said today that Latvia will definately not devalue. That devaluation would be wrong and actually not needed.

Edward Hugh said...


"and actually not needed."

Presumeably becuase everything's just fine, and the export machine is now pounding away.

A said...

"Presumeably becuase everything's just fine, and the export machine is now pounding away."

The fact is - most Latvians don't think there is any hope to increase exports. Even with devaluation.

Almost every day I hear announcements made by Latvian politicians and economists about the harm devaluation could cause.

It start to seem beyond hope Latvia will ever get out of this.

Anonymous said...

@ Edward Hugh
I do accept it....

My personal opinion ... I am against an enlarged help because the managing of the Baltic governments are absolutely wrong . This fight for the preservation of there currency reminds me of the static action of the communists. I am disappointed by the EU commissioners and the IMF which bent for the wishes of the Latvians.

now to Angela and german politics..
I believe there is no political basement for an enlarged help from Germany to Eastern Europe. On the one hand, most economic experts (of the Parties) share a similar opinion like me and on the other hand in Germany there is a strong election campaign at the moment going on.., and only that party wins new voices of the German tax payer who wona use the money for German companies etc.... Sounds bad.. but this is reality... In a time where Germany a quarrel leads with Poland about the expelled Germans from East europe, about the Baltic pipeline with Russia, the gas war between the Ukraine and Russia and the hard differences about the war in Georgia the politicians are scared to use further Tax payer money for the east.The coalition loses about 1% votes per month and they search for ways to stop it..

Anonymous said...

@ a said..
we have read already a lot of very good analyses and articles about the subject of the devaluation in here..... Now I would like to go back to the history.

In 1930 a specific deflationary policy was pursued in almost all states of Central Europe with which success? in the same time Latvia from the worldwide economic crisis has felt almost nothing . and why? because of the politics at that time which put incredibly much money in the agricultural production, the taxes lowered more money for employees which had heated up the inflation. Latvia has better gone with that policy than east Prussians only few kilometers away....
Latvia must make Exports again!! it did work and will work again..once under the autocracy of the first republic and will also function in future. There is nothing better than own production and strong devaluation is the key..

aigarslv said...

I agree about strong production and increase in export, but devaluation could be harmful! First of all majority of people who have credits in Euros wont be able to pay them back – so bank system will have big losses.
Also we must consider impact on economy that new law will bring (if it will be accepted), this law will protect citizens but will harm banks: bank cannot take away flat (bought on credit) from someone who can’t pay his debt – this will apply in 3 year time span. Also there is idea to protect Latvian exporters form banks by disallowing banks to make single-sided increase in interest rate for credit payments.

A said...

"First of all majority of people who have credits in Euros wont be able to pay them back – so bank system will have big losses."

But look, wage cuts will actually make the same effect to these credits as devaluation. So as Krugman pointed out:
"other things equal, a nominal devaluation and a real depreciation achieved through deflation should have exactly the same effect on debt service (unless some of the debt is in lats rather than euros, in which case devaluation would do less damage.)"

The point is, devaluation could be less harmful to debt service than sharp wage cuts we are doing now.

Anonymous said...

'...Poland are about to have a pretty hard time of it as a result of their export dependence on the West, and Poland has the unwinding of the zloty options scandal still to hit the front pages...'
Nevertheless, the old "Lithuanian-Polish" axis rules again: most Lithuanian SME are driving to neighbouring Poland every week to do their shopping. So goes with Joe Consumer : the new "in" thing to do on your week ends is to board one of the shopping buses that are taking Lithuanians to Polish department stores and supermarkets and coming back full up to the ears.
Lithuania saves Poland exports and Poland saves Lithuanian purchase power. Thanks to the floating of the Zloty and the peg of the Litas.
This is a clear and local example of how devaluation benefits exports.

@anonymous (about Ulmanis times)
Please don't forget that this also went hand in hand with a very strong protectionnism. I agree that agriculture was a staple of Latvian resources, but there was also a clear choice for the high technologies of the time (don't forget the VEF, RVR, Russo-Balt, Leutner were running at their peak). As our "Green and Farmers" are green only because of the 5 Lats bill colour and farmers only because of their vasarnicas, don't expect any strong commitment to help our agriculture. And as for hi tech in Latvia ? who believes it ?
The solution will have to come from somewhere else but will it come fast enough.

IMHO Latvia may have to fall, in order for Old Europe to see that it has no choice but helping all European countries. And maybe also to teach our politicians and "piramidal" businessmen and bankers that you can't keep on bullshitting indefinitely without having to pay some price. Just for this last point, it maybe worth suffering for a while.

Anonymous said...

I would XY....all economic experts, politician and other expert which told us every day this resembles in the ears, in the universities have trained and in the media have published us this myth.... This supercapitalism has brought us in one crisis after the other in quicker and quicker time intervals. We must found new banks, strip of power from the old politicians and creat new capitalism to safe Europe before the EU will be history and out young generation out of Latvia.