'New Europe' struggles to ride out economic storm

Fears are running high that ex-communist Eastern Europe's decade-long boom may be falling apart in the global financial crisis.

October 15, 2008 11:22
4 minute read.
'New Europe' struggles to ride out economic storm

UN climate guy. (photo credit: Alik Keplicz)


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WARSAW - Hungary's currency has crumbled. Stocks have plunged in Poland. Real estate prices have eroded by 40 percent in Estonia. In the Czech Republic, economic woes may delay the government's plans to privatize the national airline and switch to the euro. And Romanian "nouveau riche" tycoons complain they're hemorrhaging cash as markets yo-yo. Fears are running high that ex-communist Eastern Europe's decade-long boom may be falling apart in the global financial crisis - but there are signs that at least some of these emerging economies may be in a good position to ride out the storm. "We're going to suffer a bit and have slower growth, but there will still be growth around 4 percent - and in this environment, that's a robust economy," said Ryszard Petru, an independent analyst in Poland. "And I think Slovakia and the Czech Republic look similar to Poland," he said. "Fundamentally, they are sound." Wages, real estate prices, taxes and inflation all have been rising steadily across a region that was once a bargain for Western investors hunting for cheap labor and trying to escape the regulatory thicket at home. Although stock markets rebounded this week, tough times may be in store for the very nations that profited the most since shaking off communist rule two decades ago. Investment in offices, shopping malls and warehouses is down 42% in the Czech Republic, the consulting firm Cushman & Wakefield said, pointing to difficulties that both foreign and domestic companies are having in securing financing as lenders tighten up on credit. The country, which will hold the rotating EU presidency for the first six months of 2009, says it may have to put off its privatization of the national airline CSA and the company that operates Prague's international airport. Longer term, it also may have to delay its drive to join the euro common currency, Czech Finance Minister Miroslav Kalousek has warned, fearing the necessary belt-tightening to qualify would put the brakes on an already faltering economy. Already, the country is lagging well behind neighboring Slovakia, which switches to the euro on Jan. 1. Poland, by contrast, is pushing to join the euro sooner rather than later. Prime Minister Donald Tusk said this week that the global economic crisis has added a sense of urgency. Switching over from the zloty, he said, would help Poles "feel more secure and integrated" in the EU. The Polish government insists the country's economy is stable and virtually immune to the chaos buffeting its neighbors. Shares on the Warsaw Stock Exchange fell last week by 8 percent, and the main index hit its lowest level since June 2005, but it recovered ground this week and key officials sought to boost confidence. "The Polish financial sector is truly strong," declared Jacek Rostowski, the finance minister. Slawomir Skrzypek, who heads the National Bank of Poland, offers one explanation why: Defaults on mortgages are just 1.1 percent - far lower than in the US. "Polish banks are actually very well managed and subject to tough regulations," Petru said. Hungary, experts say, has more entrenched problems. Its hard-hit markets and flagging currency, the forint, led the Hungarian government to become the first in Eastern Europe to launch talks with the International Monetary Fund on the possibility of securing loans to stabilize the situation and ease tensions. That was a dramatic turnabout from a week ago, when Prime Minister Ferenc Gyurcsany claimed the global crisis wouldn't directly affect Hungarians. Within days, a speculative attack on Hungary's largest bank, OTP, triggered a sell-off on the Budapest Stock Exchange, coupled with a dive in the forint. Experts say Hungary's situation is a textbook example of what can go wrong when a country relies too heavily on foreign financing. Six in 10 Hungarian mortgages are denominated in foreign currencies - mostly Swiss francs and euros - and Hungarian households and companies hold more than $62.3 billion in loans pegged to a currency that's not their own. In Bulgaria, which had cashed in on a real-estate boom as wealthy Britons and Americans snap up vacation homes on the Black Sea, annual inflation is a staggering 11% - one of the highest in the EU, which Bulgaria joined in 2007. Next door, in Romania, self-made millionaires who amassed fortunes in what was one of the most vibrant economies in the former Soviet bloc have been bleeding cash in recent weeks. In just two months, the Bucharest Stock Exchange has lost a record 40 billion lei ($14.4 billion). The free fall was so dizzying, it prompted officials to suspend training twice last week. Some in Eastern Europe aren't blind to the irony. After communism ended, they were pressured by the West to privatize and sell off banks and other state assets. Now, they're watching with bemusement as the US, Britain and others practice what the Easterners were told was a no-no: state intervention. "This crisis showed that there's no more clear line between capitalism and socialism," said Zeljko Kardum, a spokesman for the Zagreb Stock Exchange in Croatia.

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