The crisis sweeping eastern Europe has entered a new phase, said Capital Economics: it’s now toppling governments. Last month Latvia’s fell after violent street protests; at the weekend the Hungarian prime minister resigned; and early this week the Czech government lost a vote of no confidence after the opposition argued that it had been reluctant to take steps to ease the crisis. The region, whose banking system gorged on foreign debt during the credit bubble, is suffering now that funding from abroad has dried up and exports to western Europe are slumping. It’s in for the worst contraction since “post-communist shock therapy”. The Czech Republic and Hungary could shrink by 5% and 7.5% this year.
While the Czech financial system has held up relatively well and the economy is in better shape than that of its neighbours, Hungary is in a “nasty predicament”, said Ian Campbell on Breakingviews. Not only is it grappling with a large current account and budget deficit, but a big chunk of domestic lending was denominated in foreign currencies. So a further fall in the forint would raise the cost of foreign loans for consumers and do more damage to the banking system. To prevent a currency collapse, the International Monetary Fund (IMF) is insisting on lowering the budget deficit to 3% to bolster confidence in Hungary’s finances, despite the recession. “Keeping both the country and the IMF on board will be tough,” said the FT’s Lex.
Eastern Europe: the weakest link
Similar problems are afflicting Romania, which has now agreed a €19bn rescue package with the IMF, and Bulgaria may not be far behind. However, the region’s “weakest link” is Ukraine, said Capital Economics. Government squabbling is threatening the next tranche of IMF money and the economy will shrink by a painful 10% this year.