As European Union leaders gather for a Brussels summit on Saturday, pressure is growing for a co-ordinated financial support package for central and eastern Europe. Where is it needed most? Much of “emerging” Europe shared decades of communist mismanagement, painful 1990s transition, then rapid growth. Now crisis has struck, it is more vital than ever not to view this as a homogenous region Some countries are far more vulnerable than others.
For a rough guide, look at current account deficits. Countries that ran up deficits exceeding 10 per cent of gross domestic product last year – notably the Baltic states of Latvia, Lithuania and Estonia, plus Bulgaria and Romania – are most at risk. As UBS notes, they score highly on risk measures including short-term debt, increase in credit since 2001, and the gap between 12-month external financing needs and foreign exchange reserves. The lower-deficit countries, Poland, Turkey, the Czech Republic and euro members Slovenia and Slovakia, are in better shape. (Russia, owing to soaring energy and commodity prices, ran up a current account surplus). While Russia, Poland and Turkey have the largest short-term external debts in absolute terms, they are among the smallest as a proportion of output.
But two countries with mid-range deficits – Hungary and Ukraine – have already had to be bailed out by the International Monetary Fund. Hungary has one of the largest debt-to-output ratios. For Ukraine, poleaxed by collapsing steel demand, five-year credit default swap spreads have leapt to 3,900 basis points as political infighting has thrown its IMF programme into doubt.
How much will the region need? A €24.5bn package to banks unveiled yesterday by international financial institutions is only a start. Under pessimistic scenarios for capital inflows in 2009, the estimate by Hungary’s prime minister, calling for a $230bn regional support programme, looks closer to the mark.
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