The outlook for some of the newer EU members in central/eastern Europe is also uncertain. Poland was the only member of the EU to avoid outright recession last year and, along with the Czech Republic and Slovakia, its public finances are in better shape thanks in part to past reforms – a fact reflected in its still relatively-low CDS rates (Chart 3). Far more vulnerable, however, are the likes of Hungary, Bulgaria, and Romania. Hungary has had an IMF Standby Agreement in place since late 2008, which should assuage investor concerns. Nevertheless, its new government has spooked the markets anew by saying it has found the public finances to be in much worse shape than expected. It claims the 2010 budget is likely to overshoot the IMF-negotiated 3.8% of GDP target and come in as high as 7.0% thanks to the previous government’s “hidden” measures. While assertions from PM Orban that there is only a slim chance of avoiding a Greek-style debt crisis were likely aimed at preparing the public for structural reforms, the effect has been to sow confusion and panic in the markets, which will exacerbate the government’s problems. Hungary cut its June 10 bond auction offer and sold bills at higher yields than in late May, as the markets await proof that the government’s economic plans can be implemented.
The European Commission is demanding an explanation for why the Bulgarian government has abruptly revised its 2010 budget forecast from balance to a deficit of 3.8% of GDP. Questions about the reliability of the country’s statistics have helped to push five-year credit default swaps to eleven-month highs. In neighboring Romania the next disbursement of IMF and EU aid is contingent on the government passing spending cuts. However, there have already been massive anti-austerity protests across the country and although the government has survived the first no-confidence test of its fiscal austerity plan, it is still vulnerable. Both Bulgaria and Romania remain in the grip of recession. There are also concerns in both countries about the potential impact on their banking sectors of financial woes at Greek banks, which account for 25% of banking assets in Bulgaria and about 15% in Romania.
Chart 3
Asia: A Quick Recovery Creates Its Own Problems
A number of factors played into Asia’s generally rapid rebound from the financial credit squeeze that started in 2008, but possibly the most overlooked of these is the prior decade of reform that most of these countries initiated in the wake of the 1997 currency crisis. The “Asian flu” triggered massive region-wide loan defaults, corporate failures and wealth destruction, but these developing economies emerged from unprecedented recessions with broad reform agendas and long-term strategies to stabilize the financial sector. It is just this kind of restructuring that built up Asia’s immunity and helped it weather the contagion that spread so rapidly from Wall Street in September 2008. More conservative lending and financing practices, avoidance of excessive exposure to derivatives and collateralized debt obligations, and more open forex systems all weeded out dramatic external imbalances and allowed most of the Asian Tigers to avoid prolonged, damaging recessions.
