Northern Country

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Posts Tagged ‘Asian crisis

Will Eastern Europe blow up?

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Many economists from Krugman to Evans-Pritchard predict financial and economic disaster among nations in Eastern Europe. Some of which probably might default and their governments collapse. A dire scenario which will pull down the world economy and the European political and monetary union. The faith of eastern Europe is therefore crucial to the faith of the world economy in general. 

The Asian crisis of the late nineties has many similarities to today’s crisis in Eastern Europe. Many Asian economies suffered from high debt to GDP ratio, high current account deficits, high currency volatility and a high level of indebtedness in foreign currency from public and private households. So do Eastern European nations today.

A strong improvement in the current account deficit  seems to be key development during times of economic crisis. Thailand saw an improvement in the current account from minus 7.9 percent to plus 12 percent. Latvia’s deficit improved from minus 22 percent to minus 5 percent. This seemingly positive but really unfortunate development is caused by a slump in internal demand. Asian economies could count on strong external demand for their recovery, something that is not the case in this crisis for Eastern Europe, at least not for now.

How dramatic the situation really is became evident from a report of the UN Conference on Trade and Development (Unctad), which states that foreign direct investment (FDI) has collapsed in the region in the first quarter of 2009. In 2008 developing countries boosted FDI inflows by a 7 percent annual growth rate, mainly due to strong performance in the major BRIC countries. However in the first quarter Unctad registered a nosedive in capital inflows to both rich and poor countries. Without this capital inflows it will be much harder to achieve economic recovery.

Not only are private investors more cautious also major rating agencies keep their focus on the sovereign ratings of Eastern European countries. On 23 April, Moody’s Investor Service affirmed Estonia’s A1 rating but left the outlook negative. Moody’s justified the negative outlook by the slump in external demand from Latvia for example. Standard & Poor’s and Fitch also left the ratings outlook negative.

Some countries like Ukraine and Hungary have already applied for financial support by the IMF. Recently Fitch announced that it expects Croatia to apply for IMF assistance. Help from the IMF and other international organizations seems to be forthcoming. This is undoubtedly a good development and should help to stabilize their economies. The currencies of most Eastern European countries have stabilized and even improved in the last two month. But since the world economy is still deep in the whole real recovery might be far off, and that is probably what is necessary to prevent another “Asian” crisis from happening.

So how do these nations compare in their respective eras of economic hardship:



Written by Alfred

25. May 2009 at 12:40 pm