The crisis in central and eastern Europe threatens to spiral out of control. Some doomsayers think that it could even lead to a breakdown of the eurozone as concerns mount over western Europe’s banks’ liabilities to the region.
These banks’ exposure to financial institutions in emerging Europe exceeds $1 trillion, according to the Bank for International Settlements, with more than $400 billion of short-term debt due this year – an amount unlikely to be met. Austrian banks have the biggest exposure by assets, followed by the Germans and Italians. Combined they total more than $700 billion.
Last month, Moody’s announced that these western European banks were at risk of a downgrade – a statement that further roiled the stock and credit markets.
Europe’s shares tanked in the statement’s aftermath, with bank stocks leading the way, especially those with big CEE exposures. Société Générale fell to a 10-year low, UniCredit’s shares plunged 32%, and Swedbank was down 14%. The grim outlook weighed on the banks’ CDS spreads too, with Erste Group’s moving out to 309 basis points from 261bp and Raiffeisen Zentralbank’s to 375bp from 329bp in the space of a week.
Moody’s statement did little for financial markets in emerging Europe itself either. The region’s currencies fell sharply afterwards, with investors selling indiscriminately. The zloty and forint hit all-time lows against the euro and the Czech koruna hit a three-year low, even though Poland and the Czech Republic are much stronger fiscally than Hungary.
Although not all countries are in the same boat, there is little doubt that emerging Europe is facing its biggest crisis since the fall of the Berlin Wall. Its much-heralded boom was driven by a borrowing binge, with much of the debt short-term and denominated in foreign currency. The shortcomings of that model are now plain to see.
What the region desperately needs is quick support from the international financial community. With the exception of Russia, there is a limited amount that policymakers in emerging Europe can do. Outside help is essential.
The IMF has already provided loans to Hungary, Latvia and Ukraine, and others such as Serbia will receive the agency’s money soon. And the World Bank, European Investment Bank and European Bank for Reconstruction and Development have pledged to provide up to €24.5 billion in support. Yet much more is required. Some analysts reckon a rescue package might need to be as big as $250 billion. While world leaders are making the right noises with talk of doubling the IMF’s emergency fund to $500 billion, the past few months have shown that there is a great disparity between politicians’ talk and their actions. Central and eastern Europe cannot wait much longer.
