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Eastern Europe's crisis:

12 March 2009
The international economic crisis has hit Eastern Europe with full force and
foreign capital is fleeing at an alarming rate, nearly two thirds gone in matter
of months. Deflation is pushing down asset prices, increasing unemployment,and
compounding the debt burden of financial institutions.
It's the same everywhere, the economies are being hollowed out and stripped of
capital. Ukraine is teetering on the brink of bankruptcy. Poland, Latvia,
Lithuania, Hungary have all slipped into a low grade depression. The countries
that followed Washington's economic regimen have suffered the most, they bet that
debt fueled growth and exports would lead to prosperity. That dream has been
shattered.
They haven't developed their consumer markets, so demand is weak. Capital is
scarce and businesses are being forced to deleverage to avoid default.
After the collapse of the Soviet Union and the Stalinist regimes in Eastern Europe
in the early 1990s, local industries were largely shut down or sold off at bargain
basement prices to foreign investors. Transnational corporations such as
Volkswagen, Renault and Nokia tried to reduce their costs by developing factories
in the low wage countries of Eastern Europe. They were supported by a corrupt,
compliant elite that mainly stemmed from the old Stalinist cadres, which provided
a crucial element to removing all political obstacles to exploitation.
Economic success depended entirely on the supply of capital from abroad. The
sudden drying up of these capital flows as a result of the international financial
crisis caused massive problems for the Eastern Europe states.
Almost all East bloc debts are owed to West Europe, especially Austrian, Swedish,
Greek, Italian, and Belgian banks. Europeans money lenders account for an
astonishing 74% of the entire $4.9 trillion portfolio of loans to emerging
markets. They are five times more exposed to this latest bust than American or
Japanese banks, and they are 50% more leveraged.
An economic crisis is quickly turning into a political crisis. Riots have broken
out in capitals across Eastern Europe. The prospects for political upheaval are
growing. Governments must act quickly and with resolve. These countries need hard
currency and guarantees of support. If they don't get help, the simmering public
fury will turn into something much more lethal.
Last year Hungary was saved from bankruptcy by a cash infusion from the IMF. And
now Latvia has also been granted a debt burden package. Poland and Estonia, whose
economies face imminent failure, have been assured a total of $400 million. The
failure of any Eastern European state would inevitably have dramatic consequences
for the entire region.
Austria's finance minister made frantic efforts last week to put together a 150bn
rescue for the ex Soviet bloc. Well he might. His banks have lent 230bn to the
region, equal to 70% of Austria's GDP.A failure rate of 10% would lead to the
collapse of the Austrian financial sector, and Unfortunately, that is about to
happen. Just look to the example of the Griffin Eastern Europe Fund, which has
lost 63% in value within one year. And the Julius B�r Black Sea Fund, which
invests in stock markets around the Black Sea, it has managed to wipe out 80% of
investors' capital in 12 months.
Last week thousands of workers at the Renault subsidiary Dacia in the southern
Romanian city of Pitesti demonstrated in defense of their jobs. The workers
demanded that the continual production breaks be lifted and that their jobs be
guaranteed. Last year, Pitesti had seen strikes for higher wages lasting for
weeks.
Anger is also being directed ever more directly against the government in
Bucharest. Shortly before the end of the last year, the government trebled the eco
tax on imported used cars, with the aim of protecting the domestic automobile
industry. But many drivers protested against the measure by mounting road
blockades.
The struggle between the population and the political elite will inevitably
increase because of the mounting economic crisis. The governments in Hungary,
Bulgaria and Romania have already announced they will implement further austerity
measures to stabilize the state finances. All political parties, are agreed that
the burden of the crisis must be placed upon the general population, but the
liquidationists would like to see governments cut off the flow of funds to ailing
financial institutions and let them fail by themselves.
The global economy is decelerating at the fastest pace on record. 40% of global
wealth has been wiped out. The banking system is insolvent, unemployment is
soaring, tax revenues are falling, the markets are in shock, housing is crashing,
deficits are soaring, and consumer confidence is at its lowest point in history.
Political leaders need to grasp the urgency of the moment and keep the vehicle
from careening into the ditch or this could spin out of control and plunge us into
another world war.