This time last year, emerging Europe was teetering on the
edge of an abyss.
Although global authorities acted swiftly to put a
floor under the crisis, which hit the region disproportionately
hard, growth looked set to languish for years ahead as
debt-burdened businesses and households struggled to regain
composure, and western European demand for the regions
Then came a new year, and with it seemingly brightening
prospects, in part thanks to a world economy on the mend, but
also on account of a raft of belt-tightening measures taken by
authorities across the region.
The IMF predicted in April that central and eastern Europe
will grow by 2.8% in 2010 and 3.4% in 2011 more than the
US and the eurozone, though still lower than most other
Manfred Schepers, vice-president at the EBRD, notes that
although much of the region has experienced political
crises or change amid serious economic troubles,
government policies have very proactively tackled the
economic problems, nonetheless.
Capital has been pouring in, coming to the rescue of public-
and private-sector borrowers while freeing central banks to cut
interest rates without causing runs on their currencies. Thanks
to IMF bailouts and the so-called Vienna Initiative, whereby
foreign lenders vowed not to abandon their regional
subsidiaries, not a single foreign bank has so far pulled
NOT SO FAST
But for emerging Europes politicians, the task of
recovering from recession has just become trickier.
Global markets have been battered in recent weeks by worries
that Greeces debt crisis could spiral out of control and
that eurozone sovereign debt burdens are similarly
unsustainable. And fears are now growing that contagion will
spill into emerging Europe.
To date, markets had begun embracing the regions
sovereign borrowers once more, thanks to a resurgence of cheap
global liquidity and general perception that central
Europes levels of government debt to GDP are
But markets may soon start demanding higher risk premiums
for many eastern European countries with large deficits, led by
Hungary, Poland and the Baltic countries, says Julian Jacobson,
an emerging markets fixed-income portfolio manager at Fabien
Pictet & Partners.
Provided the Greek crisis doesnt cascade into a
broader calamity for the eurozone, eastern European governments
may be able to ride out the volatility in the near term, thanks
largely to having front loaded much of their sovereign
borrowing needs for the year.
But the threat of a collapse in cross-border bank lending
could return to haunt the region once more. Greek banks hold
30% of the Bulgarian banking system and have significant
exposures in Romania and across the region.
If Greek or western banks recall funding from
their cross-border subsidiaries, especially in the event of a
eurozone debt crisis, the supply of credit to region, not to
mention its currency stability, could be imperilled.
A fiscal crisis in western Europe could also delay or
even scupper eurozone convergence for the region,
assuming the single currency area survives, as governments deal
with fires in their own backyards.
The eurozone crisis, no matter its scale, is likely to
affect euro adoption plans in Estonia and especially Latvia,
where an IMF adjustment programme hinges on speedy euro
ON THE UPSIDE
For now, market consensus does not foresee a dramatic
slowdown in eurozone growth in the wake of a proliferating
David Lubin, chief EMEA [Europe, Middle East and Africa]
economist at Citigroup, says that in the grip of the crisis
last year, many commentators tarred much of emerging Europe
with the same brush, despite the diversity of economic systems
and growth models.
He notes that Slovenia and Slovakia are in the eurozone
whereas the Czech Republic and Poland avoided a debt-induced
hangover unlike their Baltic counterparts that binged on cheap
credit during the bull run.
Moreover, high government debt burdens in western Europe
stand in contrast to relatively less indebted eastern Europe as
a whole despite the negative taint from debtor nations
such as Hungary, which has led to a widespread perception of
the region as chronically indebted. Hungarys projected
government debt to GDP is at 80% in 2011, whereas the average
for emerging Europe as a whole is closer to 40% on average.
But Lubin notes that the regions healthier state of
public finances relative to western Europe should serve to
discredit emerging Europes doomsayers.
BITING THE BULLET
While spending cuts and wage freezes have sparked riots in
Greece, emerging Europe has, in general, bitten the fiscal
Michael Marresse, head of economic research and strategy for
emerging Europe at JP Morgan, says that decisive government
action has helped stem the bleeding in much of the region.
In many cases, countries such as Hungary did the heavy
lifting before the global crisis intensified, and governments
have introduced an enormous number of public service
cuts, he says.
The Hungarian and Latvian governments have argued that
unpopular cuts at least in the near term are
needed to bolster investor confidence. Romania, Serbia and
Bulgaria, among others, have frozen public-sector wages and
pensions, while controversial layoffs of public-sector workers
have caused outrage among the public across the region.
Whatever the case, the fact remains that governments are now
waking up to the post-crisis reality. Across the region, growth
rates have dropped significantly relative to pre-crisis levels.
Meanwhile, lower productivity growth compared to Asian
competitors and a prolonged period of subdued western
consumption are likely to weigh heavily on growth prospects for
years to come.
Whats critical now for market confidence as
well as sustainable growth is that economic authorities
look to their home turf for new opportunities. Says the
EBRDs Schepers: Governments now need to pursue
domestic driven growth, through the creation of local pools of
equity capital, better social security and infrastructure