Well, the Icelandic authorities seem to have bitten the bullet, and after some coming and going agreed to accept assistance from the IMF. An IMF mission is on the island preparing a plan which will then be put to the Icelandic government (protocols here are important). Under negotiation are the terms of any possible loan. According to Einar Karl Haraldsson (a political adviser to the Icelandic government) the plan is expected to be finalized in the next few days, after which the government will have to decide whether to accept the aid and the terms under which it is being offered.
Meantime a growing number of countries now seem to be at risk of following Iceland and Hungary into the arms of the IMF, with the Baltic republics of Estonia, Latvia and Lithuania now looking particularly vulnerable, according to a warning from the International Monetary Fund itself yesterday.
Dominique Strauss-Kahn, managing director of the IMF, which was formally approached yesterday for assistance by Hungary as well as Iceland, said: "The fallout for most banking systems in emerging and developing economies has been limited so far but signs of stress are growing, " Strauss-Kahn said some banks in eastern Europe have become increasingly exposed to struggling property markets, having raised funds on international money markets in the same way as the ill-fated Icelandic banks.
For the time being the various national governments are denying the possibility, with Edgars Vaikulis, spokesman for Prime Minister Ivars Godmanis, being quoted in Bloomberg as saying "There is no reason to speak of threats to the Latvian financial system......Latvia's situation is different from some of the eurozone members.''
I'm sure that the latter statement is true, even if not in the sense that Vaikulis meant. Nonetheless the Latvian government has taken the step of raising guarantees on all bank deposits to 50,000 euros ($68,225), in line with an earlier decision by European Union finance ministers.
In my view the threat to the Baltic financial systems is real, as is the threat to the Bulgarian and Romanian ones. Action, of some form or another needs to be taken, and soon. Latvia and Estonia are now in deep recessions, and Lithuania, while still clinging on to growth, can't be far behind. Basically it is hard to see any revival in domestic demand in the immediate future, which means these countries now need to live from exports. But with the very high inflation they have had it is hard to see how they can restore competitiveness while retaining their currency pegs to the euro. The IMF will almost certainly insist on a currency float as a condition of rescue, and if you look at the speeches of Lorenzo Bini Smaghi and Jürgen Stark over the last year, it is clear that thinking at the ECB runs along pretty much the same lines. So better get it over and done with now I would say, and take advantage of the shelter offered in the arms of the IMF. Indeed the more I look at what is happening, the more it would appear that a division of labour was agreed to in Paris last weekend, with the EU institutional structure sorting out the mess in Ireland and the South of Europe, and the IMF taking care of all that broken crockery out there in the EU10.
In what is likely to become a sign of the times Hungary's MKB Bank announced that yesterday that it is going to stop providing euro- and Swiss franc-denominated loans until further notice. In defence of its decision MKB said the huge volatility registered in the value of forint in recent weeks, and especially the strong depreciation at the end of last week, make the outlook on the currency extermely uncertain. Most other Hungarian banks are expected to follow MKB's lead. This practice of bringing an end to the extremely dangerous practice of offering foreign exchange denominated loans in countries running large external deficits is now likely to come to a screeching halt all across the CEE and CIS economies, and bit by bit the IMF will have to be brought in to offer support during the transition back to reality.
For a full and thorough analysis of the current threat to the Baltic economies, see this whopping post this morning from Claus Vistesen.
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Tuesday, October 14, 2008
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Estonia At A Glance January 2008
Welcome to the Baltic Economy Watch Blog. Below you will find the normal chronological blog posts. But first we would like to present some charts which provide background data and which we hope will help the first time reader better assess and get to grips with the argument being presented here. The only really big question about the EU10 economies as we enter 2008 is - among the more vulnerable ones (the Baltics, Bulgaria, Romania, and Hungary) - who will be the first to go over the edge of the chasm which seems to lie out in front. Basically we have two sets of curves to look at. One set go up, and these essentially refer to prices and wages. The other set go down, and they refer to levels of domestic economic activity and consumer and producer confidence. We hope you will find the background data presented here useful in assessing the argument which we are presenting on this blog, which is basically that a key component in the emerging economic crisis which is arriving in Russia and much of Eastern Europe has its roots in the underlying demographics. Basically after years of low fertility, and in many cases out migration, there is just not the labour supply available to fuel rapid catch up growth without provoking strong inflationary pressures. We feel the evidence here is just to strong and to widespread to ignore. In the long run fertility does matter. Please click on thumbnails for better viewing.
GDP growth, which was of course strong, is now slowing, and unemployment, which has been trending steadily downwards, should really start to increase at some point. This will mean, basically, that the days when Estonia urgently needed to import migrant workers to try and avoid the huge spike in wages and prices which we have seen is now largely passed.
Private domestic consumption has almost certainly peaked, and is now in rapid decline. This is evident from the reatail sales data, and from the reducing number of notarial property contracts, which are a reasonable indication of the state of the housing market. So what happens next?
When I say that the time for fomenting rapid inward migration is now past this does not mean that in terms of longer term stability Estonia does not need to focus on raising fertility and attracting new citizens from elsewhere to compensate for those who have simply not been born: What I am getting at is that all of these issues will now take rather a back seat as the short term dynamics increasingly take over.
Unfortuantely opportunities have been lost, but there is no point in going back over old arguments. One measure of the very difficult situation Estonia will now in all probability find itself in is that the policy priority will now need to switch from attracting migrants to retaining the young workers it already has and avoiding an uptick in out migration.
The extent to which this will prove possible will depend on the level of distress which Estonia's citizen are faced with at the end of the day, and this depends on exactly how hard the hard landing turns out to be.
2008 Forecasts:Forcasts as such really go out of the window at this point, since pretty soon none of them will be worth the paper - or spreadsheet - they have been written on.
Once we see the measure of the problem we will be able to start to think about policy measures to help move forward. This is not the end of the world, but it is going to be a bumby ride and serious structural damage will be done. So all I can say is, fasten your seatbelts.
This blog will not have daily update posts on Estonia or the other Baltic countries (where the situation is not that different), until or unless events start to move at a pace which makes these desireable. There will be data updates from time to time, and extensive monthly reports, the next of which (for Estonia) will be at the start of February.
I also recommend my two recent extenisive summary posts from Claus Vistesen:
Catch Up Growth and Demographics - Evidence from Eastern Europe
Translation Risk in the Baltics and other matters on Eastern Europe
2 comments:
NB!! The IMF did NOT compare baltics with Iceland. http://www.balticbusinessnews.com/Default2.aspx?ArticleID=3a72b2c2-ea36-4d86-a013-f7c688e99f15&ref=rss
Hi T.
"NB!! The IMF did NOT compare baltics with Iceland."
No, I agree, they didn't. Indeed I don't think they compared anyone with anyone, they just said, if you are sick we can help you, come on in for a check-up. I don't think I have compared the Baltics with Iceland either.
Indeed, as I suggest in this post here, where I argue that Hungary is not like Iceland, or if you prefer that Iceland is not like Hungary, the EU10 problems are quite different from the Icelandic ones. Iceland has massive short term problems, but a reasonably bright longer term future, while the ageing and demographically related problems of the EU10 mean they have lesser short term problems and massive looking longer term ones. Unfortunately that is just the way the world is.
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