More About the Baltics and the CEE
This is really an update to the post below, but since I am not blogging as much as I would like to at the moment (school is tough this semester) I thought that I would attempt to ensure as much above the fold milage as possible. As such, and as can readily be verified by taking a swift glance across financia markets we are back to a distinct positve sentiment and this week's stock market rally (so far) on the back of the weekend's presentations of a myriad bail-out packages is almost as impressive as the last week's utter devastation.
Of course, as the fathers of economics and finance would tell us, there are no free lunches. In this way and while I fundamentally applaud the actions being taken, I cannot help but feel that what may seem so easy today in the form of transferring private sector debt over to public books may come back to haunt some governments in the future (and with a venegance too). However, this is a topic for a different post.
Meanwhile, in the context of the Baltics and the CEE the severness of the situation is beginning to catch the attention of institutional players. Consequently, as Edward detail's here the IMF, who only yesterday moved in to secure the safe handling of the downturn in Hungary, does not seem to stop there. The important news point came yesterday when IMF head Dominique Strauss-Kahn noted that the Baltic economies too might be in need of external assistance before this crisis is over.
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, now failed and nationalised. (...) These banks may be forced to reduce credit and the risk of such a scenario has risen, for instance, in the Baltic states, where house prices and credit growth have fallen, Strauss-Kahn said. Unlike Iceland, Estonia, Latvia and Lithuania are full members of the EU, and may turn to the EU for help if their economies s begin to struggle.
Now, whether this last sentence is to be understood as an idle suggestion to the EU of also peering to the east in the attempt to shore up the economy can be debated. Clearly, it does seem as somewhat that the EU has not mounted a serious response to the obvious vulnerabilities in Eastern Europe. My guess is that the someone somewhere does not know the actual exposure through trade and credit links EU15 has to EU12. Personally, I have looked at the data extensively and I can say for sure that the potential risk from a sharp fallout across Eastern Europe is not to be taken lightly.
Obviously and as per reference to the natural order of things policy makers in the Baltics are vehemently denying any kind of need for help from the EU as well as the IMF. Ultimately, it may of course very well end up as Edward muses with respect to the working domain of the EU and the IMF respectively.
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.
This seems to be a plausible analysis at this point.
Finally, and to cap off this small update pot-pourri the following snippets indicate the strain in which foreign banks operating in the Baltics are finding themselves.