Eastern Europe has received its own special bailout after all. Well, not technically a bailout, it comes as “aid” via the World Bank, European Bank for Reconstruction and Development and the European Investment Bank in a bid support the region through its first technical recession since the breakdown of the communist system. Bloomberg reports:
Feb. 27 (Bloomberg) — The World Bank, the European Bank for Reconstruction and Development and the European Investment Bank will provide up to 24.5 billion euros ($31 billion) to help central and east European banks and businesses cope with the global financial crisis.
“We have a special responsibility for the region and because it makes economic sense,” EBRD President Thomas Mirow said in a joint statement issued by the international organizations today in London. “For many years, the growing integration of Europe has been a source of prosperity and mutual benefit and we must not allow this process to be reversed.” The EBRD will provide about 6 billion euros, the EIB about 11 billion euros and the World Bank about 7.5 billion euros, the statement said. The aid will take the form of equity and debt financing, credit lines and political risk insurance.
Bloomberg explains that Eastern European nations are struggling to refinance foreign- currency loans taken out by borrowers during years of prosperity through 2007, when economic growth averaged more than 5 percent. The IMF has already bailed out Latvia, Hungary, Serbia, Ukraine and Belarus.
While all of the above is true, it’s worth remembering that CEE is also facing pressure from the fact that it has such a high proportion of foreign-owned banks operating within the region. As Citigroup pointed out in a recent note it is eastern Europe’s exposure to western banks — and the likelihood they will pull back lending because of their own troubles –that is likely to put even more pressure on local economies. The overall percentage of corporate and retail debt to GDP in eastern Europe, after all, is still a fraction of the sum in the west.
It’s on that front that Hungarian Prime Minister Ferenc Gurcsany is calling for an additional aid package of as much as €180bn according to Bloomberg, as €25b is likley to be far too small to change anything really:
Some Eastern European economies are in meltdown as the global crisis throttles demand for their exports while investment and credit evaporate. Hungary, Ukraine, Latvia, Serbia and Belarus have sought international bailouts. Regional currencies, stocks and bonds plunged as investors fled riskier assets. “We must reduce the region’s risk and that won’t happen with words alone,” Gyurcsany said. “The EU must take a lead role. This package can surely stop the quick depreciation of national currencies, which is the biggest risk in the region right now. We must raise awareness of the region’s challenges and build a framework for coordinated action”.
The question now is whether the EU will go for the plan when it’s presented in Brussels on March 1st? Some analysts are sceptical. In the interim, the most likely thing to determine if the region does indeed blow up or not, is sentiment.
Which brings us to the increasing number of cliche representations of the region in the press. Note this one from the above Bloomberg story – clearly a very fair reflection of modern day Eastern Europe, complete with its cafe culture, shopping malls, designer shops and business centres.
We can’t help thinking that CEE — what with its tangible agricultural industry and many silos of potatoes –might actually perform much better in a financial collapse than some of its western peers .
Here are some more pics to prove just how much better CEE will be at coping in a crisis:
CEE’s old people working very hard.
CEE coping with the snow.
CEE not dependent on oil.
Related links:
CEE’s western exposure – FT Alphaville
A picture is worth 163, letter to the Economist – The Economist