Central & Eastern Europe: Financial Crisis

Below is a roundup of reactions from the Anglophone blogosphere on the ongoing financial crisis in some of the countries of Central and Eastern Europe.


Antal Dániel of Central Europe Activ wrote this on Oct. 13:

After major banks and insurance corporations were bailed out by European government, Hungary has become the first member state of the EU the receive a bailout offer from IMF with the support of EU’s Ecofin. Hungary looks to be the most fragile member of the Union in the global financial crisis. […]

The Hungarian blogger believes that “the current economic situation is a result of a political crisis”:

[…] In the 2002 election campaign, both the then-ruling centre-right and the centre-left campaigned with the promise to give back more to the people from Hungary’s economic success between 1989 and 2002. The two major parties, right-wing Fidesz and the Socialist Party have outbid each other with spending promises and tax-cut promises. […] The Socialist Party has kept much of its incredible promises, driving up budget deficit to a 10% record. Sadly, a similar bidding came in the 2006 elections that the Socialists won narrowly. The Socialist Partly leader, Mr. Gyurcsány has admitted afterwards that his party lied to the voters, which made his later austerity measures rather unwelcome by the Hungarian people. […]

To overcome the crisis, Dániel concludes, “Hungarian voters […] will have to force their major parties into more rational public finance promises and policies.”

Eva Balogh of Hungarian Spectrum wrote this about the Hungarian opposition's inadequate response to the crisis:

[…] Let's start with the leaders of SZDSZ. Once again, they seem to be out of touch. […] They talk as if the Hungarian government's most important task would be “reforms.” Reforms that ended, according to them. And therefore, isn't it wonderful that they left the coalition? As if today, mid-October 2008, when the whole financial world is teetering on the brink of collapse these so-called reforms will make or break Hungary. […] Meanwhile, these petty squabbles weaken the government's efforts to keep the country's economy in balance and avoid panic. It's important to pass the budget and move on. Because there's going to be a lot of hard work ahead.

Then there is Fidesz's chief, [Viktor Orbán]. He tried to explain to a group of important business leaders yesterday that Hungary's economic problems would be solved within three months if there were early elections and he became prime minister. He would turn the economy around. Alone, in Hungary. Of course, the problem is that in a global economy no country is an island. One way or another Hungary will be affected. Less so on the front lines than some other European countries because Hungary's banks are not awash in toxic paper and Hungary was not the favorite destination of currency traders and hedge funds. But the first signs are already here. Opel's sales are down, so the Hungarian Opel factory will be closed “for a while.” However, Orbán claims that his economic team is ready with all the answers: drastic tax cuts, less bureaucratic handling of tax collection, decrease of bureaucracy and corruption, a smaller parliament, well organized public administration, and better handling of finances. Laughable? No, under the current circumstances this small-mindedness shows a lack of vision.

What is even more worrisome is that Viktor Orbán thinks in black and white when it comes to the root of the current crisis. He is certain that “liberal economic policy” is the cause of the problem and he spoke enthusiastically about those countries where democracy is not exactly in full bloom: China, Russia, some of the Islamic countries. Those are the successful ones, not the liberal democracies in the West. […]

In a follow-up post on the Hungarian politicians’ response to the financial crisis, Eva Balogh wrote about “a seven-point list of demands” put forward by Fidesz – and PM Ferenc Gyurcsány‘s “twelve-point plan”:

[…] The fact that this twelve-point plan has the blessing of the president of the Hungarian National Bank will certainly give it weight. And it includes most of Fidesz's demands. […]

Will the plan help ease the fallout of the global financial crisis? Who knows? Real damage has been done to the credit markets, and there will undoubtedly be a spillover into the global economy. How deep, how long is anybody's guess.

Edward Hugh of Hungary Economy Watch explained “why Hungary is not the next Iceland”:

[…] The longer term financial and economic future of Iceland is rosy, once they weather the present storm, and learn some belated lessons. I wish I could say the same about Hungary. […]

[…] Iceland is a young country, almost reproducing itself in terms of children, and with a rapidly expanding population of working age. Hungary on the other hand is a comparatively old country, with a rapidly ageing population, where each generation is about two thirds of the size of the previous one, and where the potential workforce and total population are now in long term decline.

This is why Iceland – even though it has gone to a huge excess – can sustain a much higher level of “leveraging” into the future than Hungary can, and why in the longer term Iceland is certainly no Hungary. I do not say any of this to criticise Hungary, or its citizens, but really out of a deep seated concern about the future of a country that I do care about. […]

At A Fistful of Euros, Edward Hugh wrote about the International Monetary Fund‘s “readiness to offer financial and technical help to Hungary”:

[…] The EU has said it welcomes the intervention. Under the circumstances there really was little else it could do. This would now appear to set a precedent, and the Hungarian case may well be followed by the Baltics, Bulgaria and Romania in pretty short order I would say, looking at the speed with which things are happening. […]

Estonia, Latvia, Lithuania

One day later, Edward Hugh continued his “IMF receivership” roll call at A Fistful of Euros:

[…] Meantime a growing number of countries now seem to be at risk of following Iceland and Hungary into the arms of the IMF, with the Baltic republics of Estonia, Latvia and Lithuania now looking particularly vulnerable, according to a warning from the International Monetary Fund itself yesterday.


In my view the threat to the Baltic financial systems is real, as is the threat to the Bulgarian and Romanian ones. Action, of some form or another needs to be taken, and soon. Latvia and Estonia are now in deep recessions, and Lithuania, while still clinging on to growth, can’t be far behind. Basically it is hard to see any revival in domestic demand in the immediate future, which means these countries now need to live from exports. But with the very high inflation they have had it is hard to see how they can restore competitiveness while retaining their currency pegs to the euro. […] So better get it over and done with now I would say, and take advantage of the shelter offered in the arms of the IMF. […]

At Latvia Economy Watch, Claus Vistesen provided a thorough analysis of the situation in the Baltic states:

[…] But while the current crisis is pretty much a generalised global one, if there is one region where the crisis is making its presence more acutely than elsewhere, that place is Eastern Europe, and among the ranks of the regional casualties high on the list come the three Baltics countries, Estonia, Latvia and Lithuania. That this is the case should not really strike us as so strange. On many occasions since the credit crisis went global back in the summer of 2007 many analysts (including yours truly) have been flagging the risk of a hard landing in Eastern Europe. This unfortunate situation has now by and large materialised and the only question which really arises is how hard is “hard” going to be? A couple of recent tentative signs suggest that the big eye of the credit crunch, not unlike Sauron with his glance toward Frodo et al., is fixing Eastern Europe fast in its gaze.


Ultimately however the immediate challenge for the Baltics at this point in time is damage control and more specifically how to wriggle themselves out of the current vice of dependence on credit inflows at the same time as the economy needs to restore competitiveness. […]

[…] What is critical for the Baltics at this point is consequently that the current economic downturn is managed in such a way to minimize the risk of a collapse of the financial system as foreign banks shut down operations. Whether this entails the maintaining of the Euro peg is a difficult question to answer. One thing is pretty certain however and this is that the kind of wage and price deflation needed to correct the imbalance would be a disaster for any political leadership.

Of the three economies Latvia clearly seems to be the most vulnerable to a rout, and given the proximity of the economies sudden unexpected events in one country could easily spread to the others. Here is to hoping that it does not come to that. […]


Next on the “growing list of Eastern European countries” lining up for IMF's support is Ukraine (see this Oct. 14 post at A Fistful of Euros).

As Edward Hugh pointed out in his earlier in-depth review of the political, social and economic situation in the country, Ukraine “is far from being alone in having banking, stock market and credit crunch problems at this point in time (but here, of course, there is no strength or consolation to be found in company).” Below are some of the more general points from Hugh's post:

[…] The current events in Ukraine may well take some observers by surprise, since the general impression has been that the economic performance has been solid and GDP growth has been strong in recent years, and this has given the impression that the underlying reality was sound, which it basically hasn’t been. The country has been bedevilled by constant infighting, while at the same time a combination of strong migration of Ukraine workers to external destinations and very long term low fertility has meant that the country endemically suffers from acute labour shortages as the population both ages and declines comparatively rapidly. Hence, in my view, the absurdly high levels of inflation we have been seeing.

Nevertheless, real GDP has grown by 7.5 percent a year on average since 2000, in line with other CIS countries, and indeed that rate has been higher than in most other transition economies: whether or not this growth was built on sand is what we are now all about to find out. […]

Peter Byrne of Abdymok began his post on the current “banking mess” in Ukraine with this piece of street wisdom (RUS): “Decent people in Kyiv always have cash on them.” He continued:

[…] [National Bank of Ukraine] chief vololdymyr stelmakh said on oct. 10 that it will take at least two weeks to calm the situation in ukraine’s finance and banking sectors.

fat chance. […]


Finally, there is Serbia on the list of “those in the IMF sick ward.” Here's yet another one of Edward Hugh's explanations at A Fistful of Euros:

[…] So, to be clear, Serbia is not an “emergency case”, like Hungary for example – although it should be noted that the Hungarian government are stating that they are not an emergency case like Iceland, who are themselves not an emergency case, like Ukraine, for example, who are in no way to be considered as being in need of support in the way in which, let us say, Latvia is. And Latvia according to Prime Minister Ivars Godmanis is not any kind of case at all, and certainly not one to be compared with Serbia.

Well, make of all that what you will, but one thing is for sure, and that is that experts from the International Monetary Fund are going to have a role in drafting Serbia’s 2009 budget. […]


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