The need to save Central and Eastern Europe

During this crisis, one of the hardest hit is undoubtedly the emerging markets.  While countries such as Russia, India, and China are all part of it, it is the countries in Eastern Europe that are in bigger peril.  The past couple of months have seen their currencies lose so much of their value against the major currencies, the Euro in particular. By mid-February, the Hungarian forint dropped to a record low of Ft304.25 against the euro and is 12 per cent down against the single currency this year while Poland’s zloty has fallen to a five-year low against the euro and is down 11 per cent this year. The Czech koruna is at a three-year low against the euro, down 7 per cent since the start of the year.  And it does not help that a big part of the mortgage loans pulled out are denominated in dollars.   With the relative appreciation of the dollar against their own currencies, paying off these debts have become so much more expensive. The cost of insuring debts by countries who have exposure to these countries, including Austria who has debt exposure of as much as 70%, are soaring. The Austrian government along with Hungary have pushed for a €150 million program to help banks in the region.

The sweet moment for the countries have been shortlived: high level of employment, freedom to work in Western Europe, cheap mortgages that made home ownership easier.  But all those are slowly fading.  As the Central and Eastern European (CEE) countries face immense economic slowdown, they see jobs lost, Western European countries’ attempt to save their own citizens from unemployment, and the default of homeowners.  Countries such as Ukraine and Hungary have already requested funding from the International Monetary Fund and perhaps the rest are about to follow soon unless their Western European neighbors – Germany, France, Italy, Spain – come to their rescue first.  Not all countries in the region are suffering as hard as the Baltic States, Hungary, and Ukraine.  Poland, Czech Republic which currently has the rotating EU presidency, and Slovakia, a Euro member are doing better than their neighbors.

From the Wall Street Journal is a commentary entitled “Eastern European Currencies Need Help Now” calling for a more urgent response and providing some possible solutions to the problem.

In the short run, the key is to avoid further excessive exchange-rate depreciations. Market sentiment is strongly negative against CEE countries and capital inflows are dwindling. Decisive actions are needed. First, strong and credible programs for fiscal sustainability, financial system stability and macroeconomic adjustment are needed in the vulnerable CEE countries to convince markets that their economies will adjust and resume growth in the future. Without these, any external help will have short-lived effects.

Fourth, the ECB should go farther in recognizing the extent of its regional responsibilities. It could do this by extending currency-swap agreements — a temporary exchange of domestic currencies into euros — to other central banks, or by accepting government bonds denominated in local currencies of noneuro-area EU countries as collateral. Even more radically, it could offer access to its euro-refinancing facilities to banks from noneuro EU countries. Such actions should apply on a temporary basis only, in response to extraordinary circumstances. They would help directly and also have a positive effect on market sentiment.


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