The deliciously named Moody ratings agency alarmed everyone last week when they published a rather moody warning that they might downgrade credit ratings of Western banks active in central and eastern Europe (CEE). Austrian banks are particularly heavily exposed after lending the region 230 billion euros, the equivalent of 70 percent of Austria’s annual GDP. If the banks went tits up in this region they could take down many of their parent banks in the West. As manager of Manchester United, Alex Ferguson once said: “It‘s squeaky bum time,” for bankers everywhere.
The zloty has sunk against major currencies over recent weeks faster than a man with a skyscraper-load of concrete in his boots. The majority of mortgages in Poland, as elsewhere in the CEE are taken out in foreign currencies. Our flat is on a euro mortgage and repayments have risen by 15 percent since last November. The majority took their loan out in Swiss francs, a plan that now looks like it had more holes in it than Emmental cheese.
After initially seeming to be getting away with it, many central and eastern European countries are now forming an orderly queue outside the doors of the World’s bank manager, the IMF, for help. Ukraine, Hungary, Belarus… There is a plan on hold for Poland, if needed.
Each month macro economic analysts sit down and key new data into computer models, press ‘send’ and watch as the screen flickers up yet another GDP growth prediction that is even more gloomy than last month’s. The government thinks maybe 2.5 percent for 2009; the World Bank this week said two percent, most independent analysts are even more moody: one percent, maybe no percent.
CEE countries inside the EU who are in the Euro Zone - Slovenia, Slovakia… - are best placed to see out the recession. Those in the EU but outside of the Euro Zone - Poland, most of them - will have a harder time but should get some protection from Brussels. Those in the CEE but outside the EU, however, appear stuffed.
The government in Warsaw looks as shocked as everyone, these days, at the pace of it all. One minister said this week that they had tried to play things down initially, because they “didn’t want to worry people.” But now the government has scrambled a package together to try and steady the ship, a bit.
Prime Minister Tusk said that if the zloty falls to 5 to the euro then his government would intervene. The day after, when the zloty didn’t fall quite that low, the finance ministry started selling euros anyway.
The pro-EU Civic Platform government have emphasised that getting into the ERM-2 mechanism as quickly as possible would help protect the zloty from such instability (although it didn’t help the pound much in the early 1990s). May or June seems to the target date.
The government has a four point strategy, apparently - bills on bank bailouts, on equity for national trading bank Bank Gospodarstwa Krajowego, on credit guarantees for businesses, and on tax relief for direct investors.
“I‘m no Obama”
But Donald Tusk warned that there would be “no massive injections” of cash into the economy. Tusk said that he was “No Obama” - as if people hadn’t actually noticed this before.
And here politicians in Poland are falling into two camps, much like the old left and right days. On the right, Donald Tusk - but in the left hand corner is Jaroslaw Kaczynski, calling for a programme of public works - a la Maynard Keynes - to protect jobs and stimulate the economy.
It’s no surprise Kaczynski is on the state borrowing and spending side of the equation. For all the emphasis on his social conservatism, he and Law and Justice have always been left on the economic front. Law and Justice, the conservative-socialists!
The World Bank report was actually much less gloomy than most. It said Poland would ride out the storm better than many in the region. But it’s still going to be rough, though not the Great Depression. There are no precedents to this. It’s something new.
And that makes me think that all the bailouts and other sticking plasters aren’t really coming to terms with what is behind this: an over producing but under consuming south Asia, and an over consuming, under producing West. This is about fundamental imbalances. But nobody seems to have a plan about that.