Country by Country Snapshot of Central and Eastern Europe Reeling in Recession     Print Email
Wednesday, 19 August 2009

In the economic meltdown, the Central and Eastern European countries are among the hardest hit – as badly as Iceland and worse than most other European countries. The financial problems in the CEE region are particularly acute because these countries were already suffering from structural economic problems: inflation, an overhang of cheap loans in euros that now must be repaid in devalued national currencies; and falling demand for their exports. Now most of these countries need large loans from the International Monetary Fund (IMF), but must comply with strict IMF criteria liable to trigger hardships for their electorates and perhaps political turmoil. Here is an overview of the region.


Bosnia and Herzegovina

Bosnia’s unemployment rate is above 40 percent and its gross domestic product (GDP) is expected to further contract by three percent in 2009.

The country is expecting €1.2 billion (USD 1.7 billion) loan from the IMF, but the IMF has laid down preconditions that include a 10 percent cut in social welfare programs and government salaries. This type of fiscal cutback has previously aggravated political and ethnic tensions among this country’s factions, a situation that could make economic stability even more difficult to attain.
Bosnia and Herzegovina already has €45 million in loans from the EBRD (European Bank for Reconstruction and Development).



Bulgaria entered recession in the first quarter of this year and the economy is forecast to contract by 6.3 percent over 2009. On August 5th the new center-right government announced plans for huge spending cuts to balance the budget by the end of the year. “The economic situation will worsen,” Finance Minister Simeon Djankov told reporters after a weekly cabinet meeting. “I expect the crisis to reach its peak in Eastern Europe towards the end of this year and in the beginning of the next,” he said. Although Bulgarians have comparatively few loans they must pay back in euros, Bulgaria does have high trade deficits incurred in euros, which are hard to pay back as the Bulgarian lev loses value.

All ministries, government agencies and other public institutions (with the exception of the education, justice and interior ministries and state media) are being required to cut planned spending by 15 percent. Most of the savings should come from cutting capital expenditure, but there are no plans to cut pensions, salaries and social welfare payments. “Our next step will be to seek ways to increase revenues by collecting more in taxes and customs duties,” Djankov said.



Croatia’s unemployment is expected to be slightly over 10 percent, and the IMF forecasts a 3.5 percent contraction of the Croatian economy in 2009. However Croatian Finance Minister Ivan Suker sticks to projections of a 2-percent downturn this year. Croatia has seen a severe rise in unemployment benefits, but must substantially cut social welfare expenditures. Croatia is faced with paying back old debts that were taken out in foreign currencies, particularly in euros, that are now expensive to repay. Croatia’s foreign debt due for 2009 is almost double its currency reserves.


Croatian officials insist they do not need an IMF loan. After an IMF mission’s visit in mid-summer, Suker said that “they gave very good marks for the revision of the budget, for our fiscal and monetary policy and for the state of affairs in public finances.”
On July 1st, Croatian Prime Minister Ivo Sanader resigned and was succeeded by Jadranka Kosor, who has kept Ivan Suker as finance minister. Kosor has vowed to revive the Croatian bid to join the EU as well as tackle the economic crisis.


Czech Republic

The Czech Republic is struggling also but is in a stronger position to maintain economic stability than many other Central European countries. Prague has been prudent in its monetary policy, by containing external debt, keeping down inflation and maintaining low interest rates. The Czech Republic expects a 3.2 percent decline in GDP for 2009. With no particular worry about having to pay back debt in expensive euros, the country’s biggest concern is reviving demand for its manufactured goods. More than three-quarters of Czech GDP depends on exports. Its largest trading partner and the key to their economic survival is western Europe: Czech Republic exports more than 30 percent of its goods to Germany alone.

It has issued a successful 5.5-year €1.5 billion Eurobond, which will help ease liquidity needs. Eduard Janota, Deputy Minister of Finance of the Czech Republic, said, “This transaction represents an important step in the execution of our funding strategy for 2009. It substantially contributes to the funding of the Czech Republic’s borrowing needs, which have increased as a result of the global recession.”


The Baltics: Latvia, Estonia, Lithuania

Latvia has suffered the most of the three Baltic states. Unemployment in Latvia is 17.2 percent and its external debt is 124 percent of GDP. Estonia’s is 116 percent, so both countries owe more than they are producing. 90 percent of Latvia’s debt is from loans taken out in expensive foreign currency (86 percent for Estonia) – an acute example of the problem of which external loans (mainly in euros) must be repaid with a devalued home currency.

Lithuania is shrinking economically to a dramatic degree: a 22.4 percent decline in GDP in the second quarter. Lithuania’s external debt is the smallest among the Baltics, but 66 percent of it is foreign-denominated. Latvia is the only Baltic state to have resorted to taking out a loan from the IMF. Estonia and Lithuania may need to soon.



The Hungarian government owes 53.2 percent of its GDP to the rest of the world on top of private debt taken out by firms and individuals amounting to 39.5 percent of GDP. It runs large deficits in government spending and in trade. The government has taken a 20 billion euro loan from the IMF and EU, but as a result has been forced to reduce social spending and cut its high budget deficit. Austrian banks have provided much of the financial services to Hungary and risk severe losses if Budapest cannot turn around its fiscal and monetary policies.

Hungary is struggling to maintain the value of its currency in order to keep the debt it holds in foreign currency from overcoming hopes of economic stability. Prime Minister Ferenc Gyurcsány resigned in March, citing economic and social reforms as the major reason.



Poland has demonstrated a positive GDP growth in 2009 (surpassed only by Cyprus in the EU). This is due to its strong internal market. Exports account for a much smaller share of GDP than its neighbors’. Only 40 percent of Poland’s production is for export (which the comparable figure in Hungary is nearly 80 percent), so it depends less than its neighbors on west European imports to be pulled out of recession.


Poland does have foreign debts to be paid back in euros, and the financial crisis has strengthened the momentum for Poland’s entry to the euro. “The world crisis has shown that it’s safer to be with the strong, among the strong and to have influence on the decisions of the strong,” Polish Prime Minister Donald Tusk said in October 2008, adding that his pro-euro policy is grounded in pragmatism and “not based on any orthodoxy, any ideology” of deepening EU integration.Poland, as a leader in weathering the financial crisis, received a 20.6 billion dollar credit line from the IMF. “While Poland is being hit hard by the global crisis, it has preserved access to international capital markets, contrary to many peers in the region,” according to Poul Thomsen, the IMF’s mission chief for Poland.



Romania has overwhelming financial problems. It has crushing debt, because it borrowed in foreign currencies to finance its domestic debts also. So debt at home as well as abroad must be paid back in the increasingly more expensive euro compared to the depreciating Romanian leu. The government is also indulging in heavy deficit spending to provide services for the county.

Romania relies heavily on international trade. It’s 2008 trade deficit was 14 percent of GDP – a figure indicating that it was borrowing foreign money to buy foreign products.

Romanian officials resent the comparisons to other struggling economies. Mugur Isarescu, the governor of Romania’s central bank, said in an interview “I am sick and tired of comparing Romania to the Baltic states and Iceland. What do we have in common?” He later added, “This is the black part of globalization, the fact that you have all these ratings agencies and others putting together six or seven countries in the same boat.



Serbia’s unemployment is expected to top 20 percent, and its economy is expected to contract by nearly 5 percent in 2009. Serbia also has a high level of debt in foreign currency mainly due to inflation of the dinar: 68 percent of total loans in 2009 are in other currencies.

Serbia was forced to take a three billion euro loan from the IMF and also to sell its state-owned energy company, NIS, to the Russian energy giant, Gazprom, at below market value. The country struggles with government spending because a large number of its citizens are public-sector employees. Tightening its fiscal belt had been difficult for political parties seeking reelection.

Serbian President Boris Tadic believes that energy policy holds the key to a collective bid to rise out of recession: Tadic told a crisis summit of Serbia and other western Balkan states that their cooperation was crucial to securing energy stability and security of supply for the rest of Europe. “Our region is becoming an energy bridge leading to end-consumers in other parts of Europe. I am sure that we are going to succeed in this if we pursue a common energy policy,” he said.