Problems in East European Economies.

Media reports tend to concentrate upon economic problems in countries such as the US and west European countries. However, some media have reported the collapse in Iceland. East Euroope however also faces great difficulties as this article points out. However whoever wrote it should look at a map. Kazahstan is not in Eastern Europe.

Tuesday, February 10, 2009

A Glance At The Upcoming Eastern European Cataclysm
Posted by Tyler Durden at 12:43 PM
As most eyes are glued to CNBC and the exploration of the huge financial problem at home, few follow just how bad the situation is at fledgling developing economies. With news of potential defaults out of Russia, Kazahstan devaluing its currency and begging for handouts, and Baltic states (Lithuania and Estonia) on the verge of downgrade, things in Eastern Europe are getting from bad to worse. This is most obvious when looking at the foreign currency exchange rates of countries in the region: since September 2008 the Ruble has lost 32%, the Polish Zloty 37%, the Hungarian Forint 29% and Ukraninian Hryvna 42%.
What are the immediate observable impacts of currency devaluation (this may also be relevant for the U.S. soon):
1. Speeds up asset quality deterioration and write-downs as unhedged corporate and retail customers that have borrowed in foreign currency face a relative increase in their debt burden.
2. Borrowers may chose to withdraw local currency savings to transfer them into a more stable foreign currency, which would shrink banks' funding base.
3. The capital ratio of banks with large foreign currency exposure will fall as a consequence of currency devaluation-related issues.
So as the vicious cycle of risk aversion accelerates in more countries, it results in domestic economies becoming worse off, thereby making traditional international commerce impossible, and impacting larger beneficiaries of globalization such as the G7.
But that is not all: in addition to sovereign risk, external investors also have creditor, liquidity and cash repatriation risk. The is because many West European banks acquired East European banks in the course of of privatization of state-owned banks during the transition from planned to market economies. According to the Bank for International Settlements, claims of West European banks on Eastern Europe amounted to €1.3 trillion in the first quarter of 2008, which depending on the degree of contraction and asset write-downs could be significantly impaired.