Some in Eastern Europe ask: What economic crisis?

Ahead of G-20 summit, Czech and Polish leaders say their banks have no toxic debt and auto factories are humming.

PRAGUE, Czech Republic – Czech Prime Minister Mirek Topolanek thinks his country is being smeared.

Headlines around the globe have spoken of once-booming, but now debt-ridden Eastern Europe dragging down if not the world then at least the whole of Europe. And because the Czech Republic is part of the neighborhood it gets lassoed in with the rest.

“It’s not right to lump all the countries together because each economy has its own specifics and we’re an example of that,” Mr. Topolanek said in an e-mailed response to Monitor questions. Czech officials have repeatedly cited a healthy banking sector, low domestic debt, and industries that still churn out goods.

On the eve of a meeting of G-20 finance ministers near London Friday and Saturday, Poland, Slovakia, and Slovenia have also been campaigning to set the record straight. This is no mere public relations exercise. At stake is the foreign investment so crucial for financing much of the rebuilding in the former communist East since the fall of the Berlin Wall in 1989.

“While no country has been unaffected by the economic crisis, in terms of the CEE [Central and Eastern European] countries, the Czech Republic, Poland, Slovakia, and Slovenia are faring far better than other economies in the region,” explains Elizabeth Stephens, head of credit and political risk analysis at London’s Jardine Lloyd Thompson (JLT).

Specifically, experts cite the following factors as signs of relative economic health:

- The banking sectors in both Poland and the Czech Republic are regarded as healthy, carrying little if any “toxic debt.”
- Auto plants in the region, like the Czech carmaker Skoda, are witnessing an uptick in production.
- Slovenia and Slovakia are now part of the eurozone, which offers a currency buffered from the worst of the crisis.
- Relatively low-wage, highly skilled workforces make the region more likely to recover faster than Western Europe.

But bad news has been squeezing out the good, and most news from the region in recent months has been dire.

Latvia has witnessed riots, financial collapse, and the downfall of its coalition government. Ukraine is desperate, barely able to pay its gas bill to Russia as production of steel – a main export – has dropped by 50 percent. Hungary, along with Latvia, have already received about €10 billion ($12.6 billion) of EU emergency financial aid.

Hungary, with $100 billion in external debt, illustrates the greatest worry. In the past, when the country’s currency, the forint, was stronger, many Hungarians took out loans denominated either in Swiss francs or euros. This was repeated in Romania and Poland. Now, borrowers in these countries are struggling to repay the loans as their home currencies have fallen by as much as a third since last summer.

BANKS CLAIM RELATIVELY SOLID FOOTINGS

European banks are facing their own sub-prime crisis, as they hold most of Central and Eastern Europe’s debt. Austrian banks are exposed at a massive 55.3 percent of GDP.

A focus of the G20 finance meeting Friday and Saturday is to coordinate what’s expected to be an increase in banking regulations aimed at curbing risky investments. Czech bank officials insist that they’re not part of Europe’s sub-prime problem. The Central Bank notes 0.1 percent of all loans are denominated in foreign currencies and that total debt to foreign banks only amounts to about $38 billion.

The Central Bank released the figures partially in response to erroneous information in Western media, and in particular stories in The Economist and Financial Times, which suggested the Czech Republic was facing serious debt issues.
In a letter to the Financial Times, the Czech National Bank’s vice governor, Mojmir Hampl, pointed out that “since the fall of communism 20 years ago, countries in the region have taken different paths in regard to economic policy.”

At about the same time in mid-February, Moody’s, the credit ratings agency, issued a report warning that the banking system in Eastern Europe is more and more vulnerable to the economic downturn. Another ratings agency, Standard & Poor’s, issued a similar warning.

“As a result of these warnings, CEE [Central and Eastern European] economies witnessed severe investor flight and currencies fell even more,” explains Ms. Stephens at JLT.

Polish, Czech, Romanian, Bulgarian, and Slovak bank supervisors have complained about the negative press over their financial sectors.

In an rare move, the supervisors issued a statement on March 4, saying “The published information ... are often oversimplified and misleading, and it can have a negative impact on banks that are operating in these countries.”

But they couldn’t blame the press on March 2, when Hungarian Prime Minister Ferenc Gyurcsany said that the deepening financial crisis could create a “Iron Curtain” dividing the rich west from poor east. It was part of an appeal for a €180 billion ($228 billion) bailout for Central and Eastern Europe issued at an emergency EU summit. The Hungarian bid was rejected not only by the EU’s richer nations – namely Germany – but also Poland and the Czech Republic, which currently holds the EU’s rotating presidency.

EUROPEAN DISHARMONY?

Political analyst Gergely Boszormenyi-Nagy, from Budapest’s Perspective Institute, told the Associated Press that the lack of unity between Eastern European countries may have contributed to the EU’s rejection of Mr. Gyurcsany’s proposals.
“It seemed that some of the other countries, like Poland and the Czech Republic, were offended at Hungary’s attempt to lump them all in the same group with it,” Mr. Boszormenyi-Nagy said.

It seems the message is getting through. EU officials have taken pains lately not to talk in such broad strokes.

Crucially, Erste Group Bank issued a report recently saying that gloomy predictions for the region are based on data that’s wrong or taken out of context. The indebtedness of CEE is “negligible” compared to Western Europe, wrote Juraj Kotian and Rainer Singer, analysts at the Austrian bank.

OPTIMISM AMIDST THE GATHERING STORM CLOUDS

Away from the halls of power and number crunchers, average Czechs say all the talk about the crisis has remained more or less just that, talk. About two-thirds of respondents to a recent opinion poll say the crisis hasn’t impacted their lives, but many in the poll say they expect conditions to worsen.

In a bit of good news, Skoda, the Czech automaker owned by Germany’s Volkswagen, has recently announced it is resuming near full production after shutting down some lines late last year. This is due in part to a mini buying boom of vehicles in Germany sparked by a government program giving Germans €2,500 ($3,200) if they junk their old cars and buy new ones.

For Martina Novakova, the crisis couldn’t have come at a worse time. The 32-year-old, her husband, and two kids just moved into a newly constructed home on the outskirts of Prague. Having lived through the depravations of communism, Ms. Novakova remains optimistic.

“I think in a year things will be better. I don’t know how deep the crisis will hit us, but I don’t think it will be anything like in Hungary, or Poland,” she says.

Some 70 miles north of Prague in Dolni Chribska, Josef Kostal says that because of the crisis he’s working fewer shifts at a German-owned thread factory. Mr. Kostal suspects that the crisis is being manufactured to let the rich scoop up even more of the world’s wealth, but he too is optimistic it won’t last long.

Asked if the crisis could shake his faith in the free market, Kostal answers with a dose of sarcasm and a swipe at the Trabant, the midget East German clunker that came to represent so much of the shortcomings of the failed communist system.

“Of course we could go back to the old system when it was so good. We had so much, everyone drove a Trabant, the shops were full. It was a wonderful time.”