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Wednesday, March 4, 2009

How Not To Manage Eastern Europe's Financial Crisis (Part 1)

"Saying that the situation is the same for all central and eastern European states, I don't see that......you cannot compare the dire situation in Hungary with that of other countries."
Angela Merkel, Brussels, Sunday


"Happy families are all alike; every unhappy family is unhappy in its own way"
Tolstoy


In Europe, leaders rejected pleas for a comprehensive rescue plan for troubled East European economies, promising instead to provide “case-by-case” support. That means a slow dribble of funds, with no chance of reversing the downward spiral.
Paul Krugman


Bank regulators from Bulgaria, the Czech Republic, Poland, Romania and Slovakia met today and issued a joint statement, ostensibly to reduce the some of the impact of what they term "alarmist comments" from the Austrian government about how the regional banking system is now in such a precarious state that it requires urgent action at EU level to prevent meltdown. The Austrian government are, of course, concerned about the impact of any meltdown on their own banking system. The result of this "reassuring statement" can be seen in the chart below (10 years, HUF vs Euro).



Within minutes of the joint statement Hungary's currency plummeted to an all-time low against the euro and to a 6.5-yr low versus the US dollar. In fact the HUF rapidly depreciated to 312 per euro from 307.50 before climbing back in later trading to 310. And the reason for this swift reaction? Hungary was not invited to join the statement. As the forint plunged, Hungary 's banking regulator hurriedly signed up to the statement, blaming the original omission on a communications mess-up, but the damage was already done.

“Each of the CEE Member States has its own specific economic and financial situation and these countries do not constitute a homogenous region. It is thus important first to distinguish between the EU Member States and the non-EU countries and also to clarify issues specific to particular countries or particular banking groups."

Well this just takes us back to Tolstoy, each of them have their own specific problems, but the underlying reality is that they all face problems, and are vulnerable, each in their own way.


Hungary's economic fundamentals are clearly much weaker than those to be found in the Czech Republic and Poland as things stand, but what about Bulgaria and Romania? And the Czech Republic and Poland are about to have a pretty hard time of it as a result of their export dependence on the West, and Poland has the unwinding of the zloty options scandal still to hit the front pages. So there is plenty of food for thought here before throwing Hungary to the wolves. A default in Hungary could very easily lead to contagion elsewhere, and then the impact in the West is very hard to foresee. We should not be playing round with lighted matches right next to our fireworks stock. "Hey, it's dark in here" and then "boom".

Yesterday it was Latvia's turn, and the cost of protecting against a Latvian default (Latvia is the first European Union member priced at so- called distressed levels) rose to a record following the announcement that the unemployement level rose from 8.3% in December to 9.5% in January, the highest level in nearly nine years. In fact credit-default swaps linked to Latvia increased nine basis points to an all-time high of 1,109 basis points, according to CMA Datavision in London. The cost is above the 1,000 level, breached last week, that investors consider distressed, and is now about 270 basis points above contracts linked to Lithuania, the next-highest EU member.

So two countries are being systematically detached here - Latvia and Hungary - and statements by EU leaders are unwittingly aiding and abetting the process. But we should all remember, after they have eaten Latvia and Hungary for breakfast, the financial markets will undoubtedly chew on other luckless countries over lunch (Romania's Q4 GDP data was out today, and it was a shocker, and S&P have already said they are "closely monitoring" the situation), before perhaps moving on to bigger game for supper.

And we should remember here, no one is too big to fall, and I have already been warning about the gravity of Germany's situation, with a rapidly ageing population, a hefty bank bailout of its own to swallow, and total export dependence for GDP growth. Final data from Markit economics out today showed that Germany's composite PMI fell to 36.3 in February from 38.0 in January. That was the lowest level registered since the series began in January 1998. And it means that the German economy - which is highly interlocked with the whole of Eastern Europe (Austria holds the finance and Germany the industrial exposure) - is certainly contracting more rapidly in the first quarter of this year than it was in the last quarter of 2008, and may well contract in whole year 2009 by something in the order of 5%. So maybe someone over there in Germany should be reading the poem you will see below aloud to "our Angela" right now (Oh, and if you don't speak German, you can find a translation here).

Als die Nazis die Kommunisten holten,
habe ich geschwiegen;
ich war ja kein Kommunist.
Als sie die Sozialdemokraten einsperrten,
habe ich geschwiegen;
ich war ja kein Sozialdemokrat.

Als sie die Gewerkschafter holten,
habe ich nicht protestiert;
ich war ja kein Gewerkschafter.

Als sie die Juden holten,
habe ich geschwiegen;
ich war ja kein Jude.

Als sie mich holten,
gab es keinen mehr, der protestieren konnte.

2 comments:

Dagowitz said...

Most of your analysis is spot-on, except for the last part-- I spend 3 months out of every year in Germany on contracting, and you don't have the right idea on this.

First of all, Germany's aging population is being easily replenished by tremendous mass immigration from Eastern Europe and Russia, the highest in the Western World (in relative numbers and in absolute numbers outside of only the USA). I don't see why your and other analyses consistently fail to take this obvious fact into account.

During my work periods in Berlin, Hamburg, Frankfurt and elsewhere, I ran into far more Czechs, Hungarians, Russians, Ukrainians, Poles (especially Poles), Belarussians and Slovaks than Germans in many places-- although the Eastern Europeans generally spoke perfect German themselves, so it wasn't always easy to tell. This is on top of the millions of "Aussiedler" (ethnic Germans from Russia, Kazahkhstan, Australia, North America and South America) who have entered in the past 5 years alone. And the vast majority of them are young, some of them singles and unmarried couples but increasingly young couples with children.

The only age-structure caveat for Germany, is that the Turks and Arabs (who are especially young) are leaving Germany in droves, partly due to policy changes that are much tougher, partly due to expiration of Gastarbeiter privileges, partly due to better opportunities in their own countries-- which are often oil-rich or, in general, less-exposed to the banking crisis. (And BTW what in the world does the poem have to do with any of this? That was a lamentation by a respected German minister 60 years ago in WWII, in 2009 we're facing a banking/financial crisis that began in the USA and Britain-- the poem has nothing to do with this.)

I don't know why otherwise intelligent, clever economy-watchers like yourself so often neglect the impact of the young immigration wave to Germany. Yes, the native-born population is aging fast, but the > 10 million Eastern Europeans, Russians and ethnic Germans from other countries have more than made up for this.

Second, when it comes to recovery from the crisis, my suspicion is that Germany will actually wind up in much better shape than most other Western countries, since it focuses on high-quality manufacturing much less than banking and services.

IOW, Germany has a real basis for its own economy, and while exports are way down right now, it's much easier for a manufacturer to stage a recovery, since it has real goods. And since Germany's goods are high-tech and high-quality, they can't just be undersold by cheap widgets from China-- nobody else makes what they do.

Don't get me wrong, there will be some upheavals-- Angela Merkel is almost certainly going to be tossed out on her ear, largely due to blunders of her own making. (She was a colossal idiot to alienate China, a growing market that Germany's exporters in particular need to be on friendly terms with.)

But Germany is blessed with decent leaders from both of the major parties, and they'll be fine overall.

Edward Hugh said...

Hello Dagowitz,

"First of all, Germany's aging population is being easily replenished by tremendous mass immigration from Eastern Europe and Russia,"

Well look, I'm sure this is true, but the fact of the matter is that Germany - along with Italy and Japan - now has the highest population median age in the world, and rising (43).


"I don't know why otherwise intelligent, clever economy-watchers like yourself so often neglect the impact of the young immigration wave to Germany."

Well thanks for the compliment, but look, the issue is a structural one. Looking at populations as they age domestic consumption weakens. This is a process I have been observing in the three previously mentioned economies and now am observing in Sweden, Finland and Austria, which are among the next most rapid agers. This is not an emotional question for me, I am simply trying to follow the facts and make sense of them.

"IOW, Germany has a real basis for its own economy, and while exports are way down right now, it's much easier for a manufacturer to stage a recovery, since it has real goods. And since Germany's goods are high-tech and high-quality, they can't just be undersold by cheap widgets from China-- nobody else makes what they do."

I don't disagree with any of this. I am sure Germany is a world leader in what it does well, its just I am looking at deeper long term structural questions. And please understand me, I write this sort of thing not because I somehow want to "get at" Germany, but because I want to try and help.

I don't know if it means anything to you, but yesterday I went to see the film "The Reader" and was deeply moved by it, "affected" almost. You don't have to be German to worry about what happens to Germany.