Eastern Europe on the Brink

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Global Trade, Macroeconomics

Could Eastern Europe be the next disaster brewing largely unseen by the international community? And if it is why should we care?

First, how serious are the problems facing parts of Eastern Europe? Dire is the answer. West European banks have lent an unprecedented amount of money to the ex Soviet block and are dangerously exposed. Austria alone has lent E230bn ($300bn) equal to 70% of Austria’s GDP according to reports in Bloomberg. The Telegraph newspaper reported the Austrian Der Standard as saying a bad debt rate of 10% on those loans would lead to the failure of the Austrian banking system. The European Bank for Reconstruction and Development (EBRD) is predicting bad debts may hit 20%. On top of loans to Eastern Europe, west European banks hold 74% of all debts (some $4.9 trillion) to emerging markets, far more highly leveraged than US or Japanese banks. The IMF has already bailed out Hungary, Ukraine, Latvia, Belarus, Iceland, and Pakistan, with Turkey next in line. The IMF’s $16bn bailout of Ukraine has already unraveled as the country’s GDP has contracted by 12% with the collapse in steel prices. Latvia’s central bank governor has declared his economy clinically dead after it shrank 10.5% in the fourth quarter ” no figures are available for how much further it has fallen in 2009. The IMF is fast running out of money to do anymore in Eastern Europe according to its chief Dominique Strauss-Kahn and called on western governments to match Japan’s pledge of $200bn at the G7 summit in Rome last week.   But the economies of Western Europe have their hands full trying to manage their domestic markets, some such as Ireland, Spain, Portugal and even Italy are at breaking point on the future of the Euro. How much they will be willing to throw to the East remains to be seen. Even vainglorious Russia is reported to have already spent a third (some $200bn) of its foreign currency reserves since the summer trying, with only limited success, to support the ruble from collapse.

So should we care? Apart from the human tragedies that go hand in hand with the above news what effect does this have on the US? So far not much and that’s why coverage has been so paltry in the media. US banks have not become anywhere near as involved in lending to Eastern Europe and US companies import only a fraction of the metal volumes bought by Western Europe. So the US exposure is relatively limited. Ukraine and Russia are significant steel and aluminum suppliers for the US but the coming year any shortfall could be made up from elsewhere.

Only US companies with European investments, subsidiaries or those that are significant importers from the region are likely to be impacted in the medium term. So for the rest, the issue is not so much commercial or economic but political, these ex soviet bloc countries were early and enthusiastic adopters of the capitalist way. If their economies continue to deteriorate for many it may seem like the good old days of communism had a lot more to commend them.

–Stuart Burns

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