Financial Crisis engulfs Eastern Europe

By Toni Straka 

Photo: Financial Crisis engulfs Eastern Europe

Financial Crisis engulfs Eastern Europe

Eastern Europe has a sudden awakening these days. After a decade long shopping spree, mainly focused on cars and home improvements, consumers in the Baltic and Balkan countries are tripping over loan payments and sustaining inflation. Edward Hugh's blog "Global Economy Matters" leads the blogging pack with an unsurpassed depth of information on Hungary's economic situation, as the country is sucked into the global credit crisis.

Attributing the crisis to the usual wrongdoings of politicians, like running up fiscal and current account deficits, Hugh highlights the country's fragile exposure to foreign currency mortgages which rose by some 50% since 2007. As if that were not enough for a country whose trade partners are slipping into recession too, Hungarians have also more than tripled their outstanding Forint-denominated loans since 2006.

Hungary was thrown a €5 billion lifeline by the ECB last Thursday to prevent a currency crisis and is in talks with the IMF about a rescue.

Foreign banks in Hungary stopped or scaled back forex lending earlier last week, as reports Hugh:

Oesterreichische Volksbanken AG's Hungarian unit suspended Swiss Franc and U.S. dollar loans in Hungary on Wednesday. The bank, which has declined to elaborate to the local press on its decision, will continue to lend euros it says. Swiss Francs are however the key currency in the Hungarian context, since around 80% of new mortgage lending has been in CHF. Bayerische Landesbank local subsidiary MKB was the first bank in Hungary this week to announce (on Tuesday) the suspension of new foreign-currency personal loans, saying the volatility of the forint made them too risky for clients. One by one the other banks in the market have all been following suit.

Hugh points to one more interesting nuance in Hungary's crisis. A majority of loans granted in the past year were forex denominated and Hungarian debtors are now in for a revaluation shock.

Austria's debtors face the same problem. Swiss Franc loans were aggressively marketed in the past years and now the hard Swissie will erase all interest rate gains made earlier, resulting in higher payments.

Suddenly The IMF is en vogue Again

Unable to withstand the crisis with their domestic means, the International Monetary Fund is getting a lot of calls from the troubled Eastern European countries. As in so many bear market stories, the crisis was not noted until a day before.

Even as late as yesterday central bank Governor Volodymyr Stelmakh had been saying IMF help wasn't needed. The banking system is "normal and reliable,'' he said in an interview.

Providing a blog for most European regions, Hugh features Claus Vistesen at his Baltic Economy Watch, who reports about economic contraction and a downgrading of sovereign debt in Estonia, Latvia and Lithuania.

The core problem is, again and again, credit-funded consumption:

Head of sovereigns in Europe, Edward Parker from Fitch consequently noted the worse than expected correction in financial markets coupled with the vulnerable macroeconomic environment as the main reasons for the downgrade. More specifically, the mixture of external deficits funded to a large extent by inflows of credit (e.g. some 30% for Lithuania) supplied by foreign banks lies at the root of the decision and incidentally, as it were, also at the root of the macroeconomic vulnerabilities of the Baltic economies.

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