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New Europe Weekly
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A challenge for EU cooperation
Fri, Oct 31 2008, 15:30 GMT
by New Europe/EMEA Research
The past couple of weeks have been extremely challenging for the central and eastern European (CEE) markets. This week has, however, brought a bit of relief after the announcement of a large IMF-led rescue package for Hungary. Unfortunately it is difficult to be optimistic about the outlook for the CEE markets and the economies given the continued deleveraging of the global economy.
Most CEE economies are struggling with huge external imbalances, with much hinging on external funding. As a consequence of the credit crisis, we have in recent weeks seen a near "sudden stop" to the "normal" funding of the CEE economies and therefore a number of countries are increasingly in need of alternative funding. The IMF can provide such funding to ensure that the unwinding of imbalances in the CEE will happen in an orderly rather disorderly fashion.
However, the ECB - rather than the IMF - appears to be the most obvious candidate for helping out the CEE markets in the present situation. The ECB has already provided Hungary with a EUR5bn loan facility, but Hungary is not the only country in need of help in the current situation. The countries with the largest current account deficits in CEE could all significantly benefit from having access to liquidity from the ECB to calm fears in the markets. A major problem, however, is that the willingness in western Europe to help out in CEE is apparently not very high. In fact, it seems that the western European policymakers believe that the problems in the CEE markets are due to bad policies in the region, while most key policymakers in the CEE have the view that "everything is fine" in the CEE. In such a political environment it is difficult to expect a CEE wide stabilisation/rescue package even though such a package undoubtedly could do a lot to make the macro adjustment in the region much smoother.
Published on Fri, Oct 31 2008, 15:33 GMT
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