Update On Eastern Europe Collapse


Over the weekend, we observed that Eastern Europe was about to go bust, taking Western European banks–and everyone else–with it.  Yesterday, the central banks or Poland, Hungary, etc., responded by making the usual ludicrous noises about how the fundamentals are sound.

Today, in the New York Times, Harvard’s Ken Rogoff and others weigh in:

“There’s a domino effect,” said Kenneth S. Rogoff, a professor at Harvard and former chief economist of the International Monetary Fund. “International credit markets are linked, and so a snowballing credit crisis in Eastern Europe and the Baltic countries could cause New York municipal bonds to fall.”

The danger is on several fronts. The big European economies, including Britain, France, Germany and Spain, are already in recession, and many of their largest banks have curbed lending at home and abroad.

For Central and Eastern Europe, which enjoyed breakneck growth thanks to a wave of credit from these banks, the squeeze could not have come at a worse time. Already bruised by the global downturn, they are on the verge of a downward spiral as the flow of credit dries up. Average growth among countries in the region slid to 3.2 per cent last year, from 5.4 per cent in 2007. This year, it is forecast to contract by 0.4 per cent — and very likely more..

Add to that a new worry: International finance officials fret that the worst regional economic crisis since the Berlin Wall came down could set off a contagion among the region’s currencies, with echoes of the Asian financial crisis of the late 1990s. Then, emerging markets like Thailand borrowed in foreign currencies to fuel growth, but suddenly owed more than they could afford to pay back once their own currencies lost value.

New to the story of this latest economic horror movie?  There’s a link to a good primer below.

See Also: Eastern Europe About To Go Bust, Taking Western Europe With It