Eastern Wind
The pressure of the Russian crisis in Eastern Europe
During the Great Depression, it was said that when the US sneezes the world catches a cold. The same holds true in the post-Cold War era vis-a-vis Russia; currency troubles within the country has blown turmoil in financial markets worldwide. For Central and Eastern Europe, this latest tempest has had a drastic effect.
It seems the closer you are to Russia, the worse the situation appears to be. In western Europe, the impact of the financial crisis was an average fall of 2-4% on the exchanges. In Vienna, the Austrian stock exchange registered a 5% drop. Yet within Central and Eastern Europe it was much worse: Poland and the Czech Republic both recorded a 6-7% drop in their indexes.
The worst hit, however, was Hungary. On Black Thursday (August 27th) the Budapest index saw its second biggest drop ever, plummeting 14%. This drop comes as a surprise for two reasons. Firstly, it's double that of both the Czech Republic and Poland, two economies that are usually grouped together with Hungary's as representative of the most "advanced" of the developing economies of the former East Bloc. Secondly, and more importantly, is the smug air of confidence that Hungarian officials exhibited toward the looming threat posed by the Russian financial crisis.
In an interview last week about the emerging crisis, the Finance Minister, Zsigmond Nyari, confidently predicted that Hungary would remain unscathed by what was happening in Russia. He cited the fact that Hungary's currency was stable and that there were ample reserves to back it up. Furthermore, he went on boast that Hungary was in a position to be the financial capital of the region, and that the Russian crisis was actually a blessing in disguise, for it would hasten this development.
Looking at the shape of Hungary's index last week, it would seem that the Finance Minister had some cause for optimism. But Hungary's ability to withstand the initial downturn experienced by other markets was not due to sound economics. Instead, it was due to the fact that the markets were closed for two days because of a public holiday.
In due course, the pressure of the Russian financial crisis forced itself upon the Hungarian economy with a vengeance. Already on Monday, trading was stopped because of a sharp fall in the Budapest index. This portent of things to come was enough to force the Finance Minister, the head of the Hungarian National Bank (MNB), and the Prime Minister to meet to discuss the situation. Their conclusion was that there was nothing to worry about. The Finance Minister then reiterated his conviction that the Russian crisis did not, and would not, have an averse effect on the Hungarian economy.
Since then, things have gone from bad to worse. The government had to twice intervene to prop up the currency. Blue chip stocks on the Budapest stock exchange fell by double digit percentage points, with one of Hungary's leading stocks, the National Savings Bank (OTP), falling by 20%. In just a week the Hungarian index lost almost a quarter of its value.
Nyari has since changed his outlook, blaming the poor performance of Hungary's stock exchange on the Russian financial crisis. Yet such an admission is too little too late. What is more, most financial analysts and experts within the region are still having a hard time to come round and accept a very unpleasant fact: the "Long Boom" is over. While they may blame their woes on their eastern neighbour and how investors unfairly lump all of Central and Eastern Europe together as a homogeneous whole, the fact of the matter is the global economy is in bad shape: Southeast Asia is still unable to bring itself out of its own crisis; in Japan there are increasing fears that political bickering will not only delay measures to end its worst recession in decades, but also stall clean-up of a banking system crippled by bad debt; and the American economy is showing early signs of a slow-down.
To all this must be added recent unrest within Central and Eastern Europe toward the concept of "free trade". The Polish government has been under pressure by farmers to raise tariffs and protect against cheap imports of Hungarian grain. This follows similar actions taken by the Czech Republic earlier this year against apple imports coming from the European Union. With a high percentage of their populations living in rural areas and dependent on agriculture for their livelihood, Central and Eastern Europe is still trying to come to grips with a "liberalised" agricultural policy as demanded by western Europe.
As a result of all this, talk has been circulating recently of reintroducing a COMECON-like trading system. Many are beginning to realise how vulnerable they are within the global economy, and are thus looking for ways and means to offset the effects of what looks to be a global crisis. For the moment, however, there is still some cautious optimism that somehow the crisis will blow over, although no-one is venturing opinions anymore on when this might be.