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Eastern European economies face bankruptcy
- Text size
Niall Green
Global Research
October 24, 2008
The economies of central and eastern Europe are being rocked by the crisis of world capitalism, compounded by the corrupt and pro-big business policies of their local elites.
Defying many economists and commentators, who had forecast that the region would be well placed to deal with the credit crisis due to the lower relative weight of finance capital within their national economies, much of Eastern Europe stands on the verge of insolvency and deep and protracted recession.
Following the collapse of the Soviet Union and the Stalinist states, central and eastern Europe provided global capitalism with vast new sources of cheap labour and raw materials. In the early 1990s the recession affecting the Western economies, accelerated the flow of capital into the former-Soviet countries, with transnational corporations seeking to cut costs by outsourcing to this newly opened-up low tax, cheap labour areas.
Major global manufacturers such as General Motors, Volkswagen and Nokia invested hundreds of millions of dollars into new factories, taking advantage of the large pools of highly-skilled and educated workers, many of whom had lost jobs in the old state-owned industries that were closed following the restoration of capitalism. Western financial institutions profited from financing the development of new industrial plants, as well as property speculation among the new bourgeois elite and foreign investors in major urban areas like Prague, Warsaw and Bratislava.
Business consultancy, Capital Economics, reports that 17 years after the restoration of capitalism and four years after most joined the European Union (EU), wages in the eastern EU states are still only one fifth of the average of those in Western Europe.
An estimated five million workers have left the eastern European countries for Western Europe between 2004 and 2007. The mass migration from the ex-Soviet states has left key sectors of the economy and public services such as healthcare critically short of skilled workers. Poland and Ukraine almost had to abandon their status as co-hosts of the 2012 European Football Championship due to the chronic shortages of labour needed to renew facilities for the competition.
Only a few months ago, a recession in Western Europe was viewed as a potential boon to overheated Eastern Europe economies. Inflation, running at 15 percent in Russia and Latvia, seemed to be the greatest threat. However, as the full impact of the global crisis unfolds, the alleged ability of Eastern Europe to weather the storm relatively better than its Western counterparts has been thrown into question.
All the economies of the eastern European region are highly dependent on credit from the international markets. The Institute of International Finance has estimated that total private capital and credit flows into eastern Europe, the former USSR and Turkey, are likely to fall from nearly $400 billion in 2007 to an estimated $262 billion next year, a figure which may fall even further as it is based on optimistic forecasts of the effectiveness of the international governmental bailouts of the banks.
Erik Berglof, chief economist of the European Bank for Reconstruction and Development, stated that the eastern European countries, “could deal with rising borrowing costs and an economic slowdown coming from the US and Western Europe, but a complete shutdown of international borrowing—nobody can withstand that.”
The International Monetary Fund forecasts a fall in the growth rate for gross domestic product (GDP) for central and southeast Europe from 5 percent this year to 3.5 percent in 2009. For Russia and the former Soviet Union, it predicts growth of around 7 percent for this year and 5.5 percent for 2009.
Emergency bailout for Hungary
Even these figures fail to show the full impact of the economic crisis on countries whose economies are heavily dependent on exports to the wealthier western EU.
The impact of a recession in France, Germany and Britain will be acutely painful to the eastern economies of Europe. The Czech Republic, for example, relies on exports to the wealthier euro currency zone for 40 percent of its GDP. As the British magazine, the Economist, stated, “If Germany gets a headache, eastern Europe gets a migraine.”
On October 16, the same day countries across the EU pledged to shore up the banking system with a package whose total could exceed €2 trillion, the European Central Bank (ECB) granted Hungary a bailout worth €5 billion, saving its economy from a financial meltdown.
The International Monetary Fund (IMF) is poised to offer the country a further, and probably much larger, bailout loan.
Last week, Hungary put tight controls on foreign exchange lending in an effort to stabilise the country’s troubled financial sector. This prompted a massive drop in the value of the Hungarian currency and stock market, quickly followed by sharp rises on the news of the ECB bailout.
- A d v e r t i s e m e n t
Hungary has a very high level of foreign public debt—60 percent of GDP—meaning that the country is less attractive to foreign investors and less creditworthy to private and international lenders. Global credit ratings agencies Fitch and Standard and Poor’s have lowered Hungary’s rating to BBB+ , the third lowest investment grade offered to any country.
In addition, many ordinary citizens and local firms have loans with Hungarian banks that have been packaged in complex schemes based on the speculation that the Hungarian forint would stay on the same exchange rate as the euro. That situation is likely to change as Hungary’s high budget and current account deficits pressure the devaluation of its currency, which is now trading at a two-year low, further destabilising its banking system.
The government of Prime Minister Ferenc Gyurcsany has reduced its official GDP growth forecast for 2009 from three percent to just 1.2 percent, and has acknowledged it is planning a budget based on a zero percent growth rate next year. The Hungarian government has pledged to cut its budget deficit, meaning that public services spending and wages will be driven down.
Nick Chamie, of RBC Capital Markets, has warned that much of eastern Europe is ill-equipped to bail out the financial system and may suffer the same fate as Iceland, whose financial system has seized-up with the collapse of its three major banks.
“The three Baltic states along with Ukraine, Kazakhstan, Bulgaria and Romania—and of course Iceland—are top of the list,” of those vulnerable to an investment exodus, Chamie warned.
Baltic states in crisis
Latvia and Estonia are officially the first economies in the eastern EU to fall into recession. Lithuania, whose growth has been slower than its Baltic neighbours, is likely to officially enter a recession in early 2009 and has been forced to guarantee the deposits of savers up to the value of €100,000, double the average EU guaranteed amount.
The Lithuanian prime minister was forced to appeal for calm in early October, stating that “There is no danger for any Lithuanian bank to go bankrupt. We monitor the situation constantly.” The country’s banking sector is dominated by the Swedish bank SEB.
The heads of government of all three Baltic states issued statements October 10 insisting that their countries were not headed for insolvency. “It is impossible to compare Lithuania with Iceland,” Prime Minister Gediminas Kirkilas told a joint news conference with his Latvian counterpart.
Reinhard Cluse, “emerging Europe” economist for Switzerland’s UBS bank, was more cautious, stating in response to the financial situation in the Baltic states:
“Iceland was a special case, but the same rising waters that flooded Iceland first are a problem for others, too.”
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October 24th, 2008 at 1:27 pm
well, we people of Bosnia are f… up since 1991 by western leaders so nothing new for us.
October 24th, 2008 at 1:33 pm
kosovo is Serbia……………………………….
October 24th, 2008 at 1:47 pm
Eastern Europe has an economy?
October 24th, 2008 at 1:53 pm
This article is overblown. Cheap labor will always outcompete reach spoiled expensive one.
October 24th, 2008 at 2:02 pm
Serbia Gucha 2007 WOW
Kosovo is Serb !
October 24th, 2008 at 2:56 pm
re: #5
I agree with your assessment that the central banks are orchestrating this fiasco to attain their own gains.
The instrument of mass destruction that has been used against the countries of the world is economic prosperity offered as a benefit to dealing with the World Bank and the I.M.F. but with the strings attached that allow these lending institutions to gain economic control over a country.
I covered an article on my blog that originated in Itar-Tass, about how Russia has tried to join the World Trade Organization (W.T.O.) for the last 13 years and has repeatedly been denied membership because they cannot agree to allow price-fixing of their exported oil and agricultural products because it would take control away from Russia and de facto give control of a significant portion of the Russian economy to outsiders who clearly do not have Russia’s best interests at heart.
Economies that have compromised their stability by closely integrating with Western markets will suffer the greatest losses due to that very vulnerability.
I thought that Russia would be prepared for this event because they were initiating what could have been a secondary or alternate international trading cooperative in which markets with minimal Western economic exposure would be central players and if that had occurred in a timely fashion, the central banks would have had to do one of two things to address this threat to their power:
1) Re-inflate the markets and suspend their current takeover plans for a time in the future when they might be successful against the new world market.
2) Find any reason possible to go to war with member nations participating in the new international market in order to destabilize it because otherwise it’s members would realize a global wealth that rivals the Western economic model at it’s height.
If the West attacks Venezuela and attempts to occupy it, the real reason is economic.
Iran ran afoul of the West when it removed the U.S. Dollar from it’s accepted currency for oil.
If we attack Iran it’s for economic reasons.
If we attack Russia it is for economic reasons.
Does anyone really think that the West is so-in-love with Saakashvili?
It all boils down to the age old adage that “All war is economic”.
If you doubt this, remember that the West helped put Sadaam Hussein in power.
The West helped him fight against Iran by selling him arms and supplying him with intel.
The West looked the other way as he killed thousands of his own people.
But when he started flooding the world markets with cheap Iraqi oil after being told by the West not to, he had to go.
October 24th, 2008 at 2:58 pm
Does anyone know how this global economic crisis is affecting Israel?
October 24th, 2008 at 3:16 pm
#7 I was wondering why Russia does not want to join the WTO, now i know – thanks
#2 and #6 You dont look Serb to me, why do you post empty slogans?
October 24th, 2008 at 3:48 pm
the poles are returning to poland from britian or they were it looks like poland will not escape , but guess what they have tons of silver loads of it, silver is money same as gold and latinum , so buy some property in poland at least their currency is backed by something
October 24th, 2008 at 4:24 pm
my sources told me about 6 months ago this financial crisis would hit and that Latvia is the best suspect for national default in Europe because of its highly leveraged credit economy. Lithuania is in much better condition as far as that goes. Poland already had massive unemployment and this almost total brain drain to the UK. Brain drain is the wrong word. Kids and young adults who can work have left for the UK and have communities, newspapers and radio stations in Polish there. Estonia is tied up with Finland because of the linguistic/ethnic ties. I assume Belarus will be almost totally unaffected because they don’t do globalism and have their own heavy industrial internal and export economy. They make harvesters and tractors and large equipment type stuff.
October 24th, 2008 at 5:04 pm
re: #11
Nope, Belarus just agreed to accept terms on a loan from that infamous banking front…
http://english.pravda.ru/world/ussr/106610-0/
Belarus will be compromised.
There are usually “terms” applied to these loans that deprive the applicant-nation of some portion of their autonomy.
October 24th, 2008 at 5:07 pm
Something to take your mind off politics…hehehe
http://video.xanga.com/afreepr.....video.html
October 24th, 2008 at 7:47 pm
This is the way it gos….http://www.brasschecktv.com/page/187.html
October 24th, 2008 at 10:21 pm
People that write long comments need to start using paragraphs. I pass over and do not even attempt to read any comments that are more than 4 lines with no paragraph spaces. No matter how good your statement may be I will just go to the next comment. Learn to write the correct way.
Same goes for any religious statements. As soon as you start quoting scripture, you lost me as a reader. I do not care if you are religious or not, try to write comments that would appeal to everyone or else you are just talking to a percentage of the people reading, instead of everyone.
Just my thoughts. I am sure I am not alone on this one.
By the way, I will be posting this on multiple articles over multiple days or even weeks. If you do not like it, tough shits. If they do not appear regularly, then I have been censored.
Any flamers can direct their comments to the nearest brick wall.
Oh, and as of right now, 10:18 p.m. cst. I am posting this in every recent article that is on this site…let’s see how many do not appear…hmmm.
October 24th, 2008 at 10:29 pm
Doctor of the English Post #16 -
In reference to your last sentence(which is not puncuated correctly), what does this phrase mean?
“let’s see how many do not appear”
What exactly are you wanting to appear, or not appear?
October 24th, 2008 at 10:37 pm
This financial fiasco began 100 + years ago.. the players are the same family members and financial institutions.
It is no mystery.. and this man spoke of a situation that applies to any nation equally.
http://www.lexrex.com/enlighte.....racket.htm
October 24th, 2008 at 11:03 pm
When Iceland collapsed I was in total shock.
I mean, I saw it coming (as did the Icelanders I know, it seems) but I just didn’t want it to happen — mainly because Heavy Industry recently got a hold in Iceland and I’m absolutely petrified of how they might exploit the people.
October 25th, 2008 at 3:44 am
The only common factor in this whole mess is the International banking system and the IMF…All the Countries/nations GVT Treasury/Exchequers cannot operate outside their respective country,. We are witnessing the largest GVt payoff heist in history and as helpless to stop it.
October 25th, 2008 at 4:57 am
As an American I am curious.
What is the foreign perspective that this “global economic meltdown” is targeted at the United States by the world money powers to destabilize our society and fully bring it into the one world government?
Is our society being brought to the edge of civil war via ethnic strife? Looking from the outside what do you folks see? Are we Americans who believe we are being set up for economic collapse, civil war and an ensuing police state/military occupation crazy?
I know my government is a despicable thing and has/is acting with the international community (of people, not governments) at a level of wickedness unparallelled throughout human history.
Let me be among the first to apologize to the citizens of this world that we, the people of the United States, have allowed our government to become so wicked and evil in the sight of the whole world. Rest assured there are those of us who want to fix it.
I know most of you think that we Americans will just sit back and do nothing as we have done so many times in the past. For most Americans that may be true, (for awhile), but I feel confident that there may be enough real American men here who will give their lives to bring about the change neccessary to free us and the world of the tyranny that has befallen us.
Even though we as a nation have turned a blind eye to the meddeling our government has done in your countries I would ask those of you who believe in God and forgiveness to pray for our success. Perhaps by setting ourselves free (again) we can in some small way loosen the chains put upon you on our behalf.
It’s fixin to get intense here. Should we the (real) American people undertake the task that is set before us and grow the balls to do what needs to be done then perhaps you, the world, can accept that there are those of us here who do believe in honesty, integrity, honor, truth and justice. Because there are few of us who also admire courage it may take time to bring about the real change we need so please be patient. This may be our last chance and we can’t afford to screw it up. Just know that the time is very near.
In the mean time I’m asking you to please pray for those of us who are willing to give our lives to see things set right. We’re going to need it.
October 25th, 2008 at 5:05 am
.
” Strike another match, start a new; it’s all over now – baby blue. ”
~ Bob Dylan
October 25th, 2008 at 5:40 am
response to #22
The p.o.v. from myself (in England ) is why on earth does the U.S. waste 1 trillion dollars on a defense budget when there is no possibility of another country declaring war agianst the U.S.
” Arms keep peace ” is an old roman saying , but it would seem the overinflated price of the defense budget is adding to the nations debt which will exhaust the wealth of its citizens and house reposesions will follow along. David Rockafella is quoted as saying ‘China is the ideal model for all Nations’ and he has all the insider knowledge. A return to the fuedal system is what I expect the U.S can look forward too, those with the wealth will want one thing only, respect. Get ready to lick some boots America, you all can see it coming.
October 25th, 2008 at 11:06 am
apostle,
yes. you are a complete loon.
who are these “world money powers”, by the way?
October 25th, 2008 at 6:14 pm
whether a country has a communist or capitalist regime matters not.
The degree to which a country’s ruling parties and favored parties and special interest groups seek to establish advantage over all other groups within that country is largely the reason for these great iniquites that we are seeing. It’s all a matter of people taking advantage of one another and most importantly, the LACK OF LOVE (JESUS). All other considerations will pale in comparison and will have little or no effect.
Jesus is the King, he controls everything!
James Mansfield
October 25th, 2008 at 11:58 pm
lol (#24), grow up. The money powers are the people who own the central banks around the world, and the same kinds of people that T. Jefferson had a very uneasy opinion about, and Andrew Jackson publicly spoke out against.
October 26th, 2008 at 12:34 am
DO YOU people remember that old book by Ravi Batra on the coming Great Depression in the 90s?
He spoke of the consequences of too much concentration of wealth causing a depression.
That’s what we are experiencing today with the private banks hogging everything.
If money is a claim on future labor, who’s going to do the labor with concentrated wealth?
We are going to see a collapse where no one has any claim on labor except when some store of value is offered, such as gold.
It’s obvious that the rich do not want the plebes to own gold.
I see no alternative to some type of revolution, but right now the sheep are still to passive and generally well fed.
George Carlin said he loved watching the catastrophes unfold. Too bad we are sitting here watching it without acting to fix it.
October 26th, 2008 at 10:43 am
Isn’t it so plain and simple to see!! These devils want all the gold and all the silver and the enslavement of the whole world is what their end-game is all about!! And the traitors who join them will live a lot better than those who oppose them!! BUT THE PRICE THAT THEY WILL PAY FOR BEING PART OF THEIR BEAST SYSTEM WILL BE GREAT!! AS THEIR TORMENTINGS WILL BE GREAT !!
October 26th, 2008 at 8:46 pm
First of all, only Ukraine Latvia, Estonia and Lithuania are Ex-Soviet countries. Second of all, the GDP per capita of Czech Republic is bigger than Portugal, so that thing with the wages being 1/5 th of the West is long gone, it is about half. We all know Orange Revolution put in control some puppets in Ukraine and it is no surprise they are borrowing money from the IMF; that is how the game is played. Western Europe needs Eastern Europe as much as USA needs China.
October 27th, 2008 at 6:05 am
Im Irish and many of the eastern Europeans are heading back at the moment. Well Ireland is in a recession too at the moment and the construction sector in Ireland was our burst bubble
October 27th, 2008 at 12:29 pm
#21 The “meltdown” isn’t news in the UK, it was top story months ago. Reported as a US crisis in financial markets and subprime derivatives that will affect the global economy negatively.
How’s this for a catchy slogal? EX THE FED!
October 28th, 2008 at 1:04 am
It’s OK, It’s only the middle class and poor who face Bankruptcy in AMERICA, THE RICH JUST GOT THE PAYDAY OF A LIFETIME!!!!!!!!!!!!!!!!!!!!!!!!!!!
November 2nd, 2008 at 11:58 pm
Of course, the whole point is to make debt slaves out of the Eastern European countries. That’s what banking is all about. The banks rule the world and only a handfull of people control the banks. The so-called democracy that the USA talks about is a front while the banks and their controllers do their dirty work.