Fears of unrest in eastern Europe grow

[justjohn]

Fears of unrest in eastern Europe grow as Czech government collapses

Presidency of EU in question as Mirek Topolanek loses confidence vote

By Vanessa Mock in Brussels and Daniel McLaughlin in Budapest

Thursday, 26 March 2009

The Czech Prime Minister Mirek Topolanek puts on his headphones at the European Parliament in Strasbourg yesterday


The collapse of the Czech government sent shivers through financial markets in eastern Europe yesterday fanning fears about the growing political unrest that appears to be sweeping through the EU's eastern fringes.

Prime Minister Mirek Topolanek's government narrowly lost a vote of no-confidence on Tuesday night, four days after the Hungarian leader, Ferenc Gyuarcsany, threw in the towel and five weeks after the Latvian government fell under a barrage of public protests. Most of eastern Europe's main currencies lost value yesterday as Czechs pondered the impact of Mr Topolanek's defeat, while Romania turned to the IMF for a €20bn lifeline.

The government in Prague was fatally wounded by a series of scandals rather than looming financial meltdown, but with its removal another element of uncertainty has been added to eastern Europe's volatile mix of economic weakness, political frailty and rising public discontent.

The Czech Republic is not being crushed by a mountain of debt or huge trade imbalance, as are Hungary, Ukraine and Latvia, but it is suffering as major export markets like Germany shrink. Like the neighbouring Poles and Slovaks, Czechs are braced for a sharp economic slowdown this year, although have no need for an emergency IMF or EU cash injection.

Yet, Mr Topolanek's fall will be particularly chastening for many leaders around eastern Europe precisely because he has presided over one of the region's most stable economies.

"The lost vote is yet more proof that the situation in the region isn't either economically or politically stable, especially taking into account that the Czech Republic was seen as one of the best countries in eastern Europe," said Bartosz Pawlowski, a strategist at TD Securities in London,"so it's hard to expect investors will now be seeking to invest their money in other countries, like Poland or Hungary."

The Latvian government fell last month after a looming recession sparked riots and Hungary's premier quit in the face of political deadlock over how to slash public spending. Romania's unwieldy coalition has also shown cracks over how to balance cutbacks, and Bulgaria's government is likely to lose a summer election following violent protests in Sofia.

Although Mr Topolanek's centre-right coalition was fragile from the start, it had survived earlier votes. The timing of its collapse threatens not only to hamper Prague's efforts to stave off a downturn but comes halfway through the country's stint at the helm of the rotating EU presidency.

Yesterday in Strasbourg the defeated Czech premier moved to reassure EU partners that the collapse would have "no impact" on the [EU] presidency. In Brussels, however, diplomats faced concerns on the Czechs' ability to steer the union with any credibility in a season dominated by a flurry of emergency summits on the economic crisis. "It's a particularly bad time just when there needs to be maximum coherence just days ahead of the G20 summit," said Katinka Barysch, of the Centre for European Reform.

The Czechs will represent the EU at next week's summit in London, when the bloc plans to lead calls for more regulation of international financial markets. Mr Topolanek had also banked on a grand ceremony to welcome President Obama to Prague on 5 April. "Now Mr Topolanek will just look like a lame duck" said Piotr Kaczynski of the Brussels think-tank the Centre for European Policy Studies. "He may just be able to keep things ticking along but he no longer really has any clout to speak on behalf of Europe."

Yet despite the succession of woes afflicting some of the EU's former Communist states, some observers cautioned against linking the political musical chairs in Prague to a pessimistic narrative about the region. "What happened in the Czech Republic was driven by politics," said Mr Kaczynski .

"It is increasingly popular to talk about a malaise in eastern Europe but it's utterly wrong to link these countries together. True, Latvia and Hungary are taking a battering but there are actually very troubling signs of political unrest in places like Greece, Ireland or France as well, but they are never cobbled together in the same way."

On the brink: The sick men of Europe

Latvia

A few months ago, it was the EU's fastest growing economy, with growth of nearly 11 per cent. Now Latvia faces economic ruin. In February the government collapsed following violent demonstrations in the capital Riga in protest at the government's handling of the crisis and steep IMF-imposed cutbacks. Farmers have blockaded the capital in protest at plummeting incomes, while unemployment has risen to 10.4 per cent, more than double what it was a year ago.

Hungary

Premier Ferenc Gyurcsany resigned last weekend amid efforts to impose austerity cutbacks demanded by the IMF. Hungary was the first EU member to seek an IMF bailout to stave off economic collapse. The Hungarian economy is expected to contract by as much as 3.5 per cent this year. Public sector unrest over tax and pension reforms is at boiling point and social tensions have risen with "Gypsies" blamed by nationalist groups for a crime wave linked to the worsening economic conditions.

Ukraine

Demonstrations occur almost daily as the country teeters on the brink of collapse. Economic output has plummeted and Russia continues to meddle in its energy industry. Despite this, President Viktor Yushchenko and Prime Minister Julia Tymoshenko are still locked in a power struggle that has paralysed Ukrainian politics since the 2004 Orange Revolution. Now the IMF has postponed payment of the second tranche of a $16.4bn loan due to their failure to agree on a budget.

[Jaga]

John,

this is sad. It looks that Polish situation is not that bad than in some of the neighboring countries.

Below is an interesting opinion of a person who was working in IMF about crisises in EE countries and how olligarchy fights it back.

At the end of the article there is a sad note that the crisis in America is similar to the other countries crisises - when the reachest of the rich overinvest but then built their alliances in government so that.... the regular folk is suffering but the richest are in good shape.

www.theatlantic.com/doc/200905/imf-advice

The Quiet Coup

ONE THING YOU learn rather quickly when working at the International Monetary Fund is that no one is ever very happy to see you. Typically, your “clients” come in only after private capital has abandoned them, after regional trading-bloc partners have been unable to throw a strong enough lifeline, after last-ditch attempts to borrow from powerful friends like China or the European Union have fallen through. You’re never at the top of anyone’s dance card.

The reason, of course, is that the IMF specializes in telling its clients what they don’t want to hear. I should know; I pressed painful changes on many foreign officials during my time there as chief economist in 2007 and 2008. And I felt the effects of IMF pressure, at least indirectly, when I worked with governments in Eastern Europe as they struggled after 1989, and with the private sector in Asia and Latin America during the crises of the late 1990s and early 2000s. Over that time, from every vantage point, I saw firsthand the steady flow of officials—from Ukraine, Russia, Thailand, Indonesia, South Korea, and elsewhere—trudging to the fund when circumstances were dire and all else had failed.

Every crisis is different, of course. Ukraine faced hyperinflation in 1994; Russia desperately needed help when its short-term-debt rollover scheme exploded in the summer of 1998; the Indonesian rupiah plunged in 1997, nearly leveling the corporate economy; that same year, South Korea’s 30-year economic miracle ground to a halt when foreign banks suddenly refused to extend new credit.

But I must tell you, to IMF officials, all of these crises looked depressingly similar. Each country, of course, needed a loan, but more than that, each needed to make big changes so that the loan could really work. Almost always, countries in crisis need to learn to live within their means after a period of excess—exports must be increased, and imports cut—and the goal is to do this without the most horrible of recessions. Naturally, the fund’s economists spend time figuring out the policies—budget, money supply, and the like—that make sense in this context. Yet the economic solution is seldom very hard to work out.

No, the real concern of the fund’s senior staff, and the biggest obstacle to recovery, is almost invariably the politics of countries in crisis.

Typically, these countries are in a desperate economic situation for one simple reason—the powerful elites within them overreached in good times and took too many risks. Emerging-market governments and their private-sector allies commonly form a tight-knit—and, most of the time, genteel—oligarchy, running the country rather like a profit-seeking company in which they are the controlling shareholders. When a country like Indonesia or South Korea or Russia grows, so do the ambitions of its captains of industry. As masters of their mini-universe, these people make some investments that clearly benefit the broader economy, but they also start making bigger and riskier bets. They reckon—correctly, in most cases—that their political connections will allow them to push onto the government any substantial problems that arise.

In Russia, for instance, the private sector is now in serious trouble because, over the past five years or so, it borrowed at least $490 billion from global banks and investors on the assumption that the country’s energy sector could support a permanent increase in consumption throughout the economy. As Russia’s oligarchs spent this capital, acquiring other companies and embarking on ambitious investment plans that generated jobs, their importance to the political elite increased. Growing political support meant better access to lucrative contracts, tax breaks, and subsidies. And foreign investors could not have been more pleased; all other things being equal, they prefer to lend money to people who have the implicit backing of their national governments, even if that backing gives off the faint whiff of corruption.

....

[Jaga]

from the same article:


Squeezing the oligarchs, though, is seldom the strategy of choice among emerging-market governments. Quite the contrary: at the outset of the crisis, the oligarchs are usually among the first to get extra help from the government, such as preferential access to foreign currency, or maybe a nice tax break, or—here’s a classic Kremlin bailout technique—the assumption of private debt obligations by the government. Under duress, generosity toward old friends takes many innovative forms. Meanwhile, needing to squeeze someone, most emerging-market governments look first to ordinary working folk—at least until the riots grow too large.

Eventually, as the oligarchs in Putin’s Russia now realize, some within the elite have to lose out before recovery can begin. It’s a game of musical chairs: there just aren’t enough currency reserves to take care of everyone, and the government cannot afford to take over private-sector debt completely.

So the IMF staff looks into the eyes of the minister of finance and decides whether the government is serious yet. The fund will give even a country like Russia a loan eventually, but first it wants to make sure Prime Minister Putin is ready, willing, and able to be tough on some of his friends. If he is not ready to throw former pals to the wolves, the fund can wait. And when he is ready, the fund is happy to make helpful suggestions—particularly with regard to wresting control of the banking system from the hands of the most incompetent and avaricious “entrepreneurs.”

Of course, Putin’s ex-friends will fight back. They’ll mobilize allies, work the system, and put pressure on other parts of the government to get additional subsidies. In extreme cases, they’ll even try subversion—including calling up their contacts in the American foreign-policy establishment, as the Ukrainians did with some success in the late 1990s.

Many IMF programs “go off track” (a euphemism) precisely because the government can’t stay tough on erstwhile cronies, and the consequences are massive inflation or other disasters. A program “goes back on track” once the government prevails or powerful oligarchs sort out among themselves who will govern—and thus win or lose—under the IMF-supported plan. The real fight in Thailand and Indonesia in 1997 was about which powerful families would lose their banks. In Thailand, it was handled relatively smoothly. In Indonesia, it led to the fall of President Suharto and economic chaos.

From long years of experience, the IMF staff knows its program will succeed—stabilizing the economy and enabling growth—only if at least some of the powerful oligarchs who did so much to create the underlying problems take a hit. This is the problem of all emerging markets.

[tuftabis]

Mar 27, 2009 1:42:56 GMT -7 @justjohn said:

Fears of unrest in eastern Europe grow as Czech government collapses

Here's a report from Economist Intelligence Unit (EIU)



Lighter the pink the smaller the fears of unrest. Darker the red the bigger possibility of unrest.
Seems Chech Republic, Germany, Scandinavia, Austria is doing better than the USA.
Poland, France, UK, Spain, Portugal, Benelux, Slovakia, Italy and Belarus are doing as the USA.
Baltic states, Russia, Balkans, Hungary and some other are doing worse.

To my mind and to what I feel, read and observe the EIU report mirrors reality pretty well.