Doc's Talk: The Recession in Central Europe, Part 2: Country by Country

Wednesday, August 05, 2009

The Recession in Central Europe, Part 2: Country by Country

Sratfor
August 5, 2009 | 1146 GMT

Summary

No region has been affected by the global financial crisis quite like Central Europe, where a heavy burden of foreign debt, accumulated during the boom years of the 2000s, must be repaid in 2009. Not all Central European states are burdened by the same external debt load, but most face cutting social welfare expenditures as they sign on for relief from the International Monetary Fund and the European Union. Administrations old and new will have a tough time protecting their currencies and stimulating growth at the same time.Editor’s Note: This is part of an ongoing series on the global recession and signs indicating how and when the economic recovery will begin.
Analysis

Central Europe is at the epicenter of the global financial crisis. The region became the top destination for foreign capital in 2002, overtaking East Asia; but since September 2008, it has experienced a massive outflow of foreign capital that threatens to crash the region’s currencies. The region founded its growth largely on the influx of foreign loans that are now in danger of appreciating in real value as domestic currencies depreciate.

Part 1 of this two-part analysis looked at the problems and policy options faced by Central Europe as a whole; Part 2 examines the economic and political situations unique to each country. For the purposes of this analysis, Central Europe is defined as Bosnia, Bulgaria, Croatia, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania and Serbia. We exclude Austria, Slovakia and Greece because those countries are in the eurozone.
Bosnia

Bosnia’s gross domestic product (GDP) is expected to contract by 3 percent in 2009, after nearly 6 percent growth in 2008, with the unemployment rate above 40 percent. A 1.2 billion euro ($1.7 billion) loan from the International Monetary Fund (IMF) will help stabilize the budget, but the austerity measures required by the IMF are sure to increase social tensions. The IMF requires 10 percent cuts in social welfare programs and governmental salaries, and considering that government expenditures in Bosnia total 44 percent of GDP, the IMF cuts will be substantial and have significant social impact. Indeed, the financial crisis already has threatened to reignite old ethnic and political tensions in the country, which has never truly recovered from its brutal 1992-1995 civil war.
map—Economic Crisis In Central Europe
Bulgaria

Bulgarian GDP is set to contract by around 6 percent in 2009. This, combined with an expected budget deficit of 2.5 percent of GDP, contributes to some worrisome numbers, although not as dramatic as figures elsewhere in the region.

However, Bulgaria does not have sufficient foreign currency reserves to cover its extremely high external debt coming to maturity in 2009. The problem for Bulgaria is not necessarily foreign currency-denominated lending (household-sector foreign currency-denominated lending is actually quite low), but rather years of high current-account deficits that required trade financing and corporate lending. According to Fitch Ratings, Bulgaria has $26.2 billion of debt coming due in 2009, equal to 64 percent of GDP. Therefore, despite recent assertions by newly elected Prime Minister Boyko Borisov that no IMF loan will be necessary, Sofia may be forced to consider outside funding as the second half of 2009 gets under way. This will put political pressure on the new administration very early on.
Croatia

Croatian GDP is set to plunge by about 5 percent of GDP in 2009, with unemployment expected to reach double digits (10.5 percent) following a rate of 8.4 percent in 2008. This will present new Prime Minister Jadranka Kosor with the unenviable task of picking up the pieces left by her predecessor, Ivo Sanader, who resigned unexpectedly in July.

Most pressing is the need to cut social welfare expenditures, which actually increased more than 10 percent year-on-year in the first quarter of 2009 due to an absolute increase in unemployment benefits. Croatia is also facing considerable private foreign-debt pressures, with the total external debt coming due in 2009 almost twice that of Zagreb’s available currency reserves. Also worrisome for Croatia is the high percent of foreign currency-denominated lending, which at 62 percent of total lending is one of the highest percentages in the region.

While Zagreb has not asked the IMF for a loan yet — and the government for the most part is vociferously denying that it needs one — Croatia is on STRATFOR’s short list of Central European countries likely to seek one in the second half of 2009. With Sanader’s resignation offering a release valve for social angst in the short term, Kosor may have some political room to maneuver in order to implement the IMF’s stringent austerity measures.
Czech Republic

Throughout the 2000s, the Czech Republic has been prudent enough to contain external debt, keep inflation low and maintain low interest rates. This has meant that foreign currency lending has not been as popular in the Czech Republic as it has been in other countries in Europe. In fact, lending to Czech households in foreign currency is nonexistent, with consumers perfectly content to borrow cheap koruna instead of euros.

Nonetheless, the Czech Republic will be hit by the economic crisis just as the rest of Central Europe will be hit, with an expected 3.2 percent decline in GDP in 2009. The key issue for the Czech Republic is the return of external demand for its manufactured products, particularly automobiles, which account for 18.96 percent of total Czech industrial output. With 76 percent of its GDP dependent on exports, the Czech Republic is at the mercy of its export markets in Western Europe (particularly Germany, to which it exports more than 30 percent of its goods).

Composition of Gross External Debt
Click image to enlarge

Meanwhile, the imbroglio that is Czech politics continues following the March 24 resignation of Prime Minister Mirek Topolanek, with elections called for October. The Czech Republic has a tendency to produce extremely weak governments that depend on minor parties for a majority in the parliament. Such an arrangement during a recession would severely impair the government from making the difficult decisions that are needed to get the economy back on its feet.
The Baltics (Estonia, Latvia, Lithuania)

Of the three Baltic states, Latvia has thus far suffered the most from the financial crisis. However, in terms of macroeconomic indicators, Estonia is not much different than Latvia. Estonia’s gross external debt, most of which is privately held, is 116 percent of GDP, compared to Latvia’s 124.6 percent. Furthermore, Estonia and Latvia both have a very high percentage of foreign currency-denominated loans in their loan portfolios (86 percent and 90 percent, respectively). Were Latvia to abandon its currency peg to the euro, Estonia’s kroon would likely devalue as well because of investor pressures on the region as a whole.

Meanwhile, unemployment in Latvia is soaring, reaching 17.2 percent in June, compared to 7.5 percent in 2008. With one prime minister ousted in February, the current four-party coalition is looking shaky, especially as it attempts to implement the rigid austerity measures of the IMF.

Lithuania is not doing any better, with a 22.4 percent-of-GDP decline in the second quarter. Lithuania does have less of a reliance on foreign currency lending — 66 percent of total lending is in foreign currency — but it still has enough that a serious currency depreciation caused by a devaluation in Latvia would hurt many consumers and businesses.

The Baltics remain the most volatile region in Central Europe and the most likely flash point for social angst over austerity measures and the effects of the recession. One should not discount the possibility that Lithuania and Estonia could ask for an IMF loan or that further political changes are in store.
Hungary

Hungary is the only country in the region, aside from Poland, with a considerable amount of external public debt (53.2 percent of GDP) — the result of years of overspending in a politically contentious atmosphere between the main right and left wing parties. This is in addition to a considerable level of private debt (39.5 percent), most of which was fueled by foreign currency lending. The IMF and EU 20 billion euro ($28.8 billion) loan has forced Budapest to start cutting into the chronically high budget deficit, but at the cost of reducing social spending that the populace grew used to in the free-spending 2000s.

The ruling Socialists are attempting to hold on to power following the resignation of Prime Minister Ferenc Gyurcsany, with the center-right party Fidesz looking to capitalize on the crisis and come to power in the 2010 parliamentary elections (or earlier if elections could be forced sooner). Much as other countries in the region, Hungary is struggling to protect its currency from depreciation (so as not to appreciate the value of foreign currency loans) and stimulate growth at the same time.
Poland

Despite its high public and private indebtedness, Poland has thus far been remarkably resilient during the crisis. In 2009, Poland has actually experienced positive GDP growth (0.8 percent year-on-year), surpassed only by Cyprus in the European Union, and is expected to have grown (albeit at a slower pace) in the second quarter. The reason for Poland’s resilience is the fact that, unlike the other Central European economies, it has a robust internal market with exports accounting for just 40 percent of its GDP (compared to 76 percent of GDP in the neighboring Czech Republic, 80 percent in Hungary, 55 percent in Lithuania and 86 percent in Slovakia). Poland can therefore depend on consumption to spur growth and is not so much at the mercy of demand from neighboring Western Europe for its recovery.

Foreign Currency Exposure
Click image to enlarge

With consumption holding steady, Poland has been able to weather the recession on the back of its $400 billion economy. While high levels of foreign debt are definitely a cause of concern, Poland serves as an instructive example of a Central European country that has not had to depend on Western Europe for both capital and export markets. Two quarters of minimal growth in 2009 at a time when most countries in the region are far worse will also provide Poland relative political stability.
Romania

Romania is another Central European economy that is far too indebted abroad, has relied on foreign currency lending for too much of its domestic credit and is looking at a serious budget deficit. It secured a 20 billion euro ($28.8 billion) IMF standby loan in March, part of which was used to keep the leu stable so as not to allow the real value of foreign loans to appreciate.

Unlike Poland, which is an example of a Central European economy with a robust local market, Romania is the exact opposite. Its trade deficit in 2008 stood at 14 percent of GDP, indicating that not only did it borrow foreign money but also that it used the money mainly to buy foreign products.
Serbia

The Serbian economy is forecast to contract by nearly 5 percent in 2009, with unemployment crossing 20 percent (from around 18 percent in both 2007 and 2008). Because of the crisis, Serbia has been forced to take a 3 billion euro ($4.3 billion) IMF loan and sell a vital part of its infrastructure — state-owned energy company NIS — to Russian energy giant Gazprom at below market value.

The fundamental problem with Serbia is that, because of political instability and tenuous governments that have plagued the post-Slobodan Milosevic era, the country has never been able to cut its expenditures, particularly in public-sector employment. Numerous multiparty coalitions have had to cater to parties looking to advance their interests, while the government essentially raises money through the privatization of state-owned enterprises. Furthermore, the fundamental Central European problem of borrowing abroad to finance expensive Western imports is true of Serbia as well. Foreign currency-denominated loans have made up 68 percent of total loans in 2009, mainly due to the traditional instability (and high inflation) of the dinar.

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The IDF’s Minorities in Numbers and Pictures

In honor of IDF Diversity Week, we present diversity through numbers and pictures. Each year, more and more Muslims, Christians, Druze, Bedouin and immigrants from around the world take on the responsibility of defending Israel.

MUSLIMS:

Muslim Arab Israelis are not required to draft in the IDF, but there are many who volunteer. In 2013, there were over 200 Muslims serving in the IDF and over 300 in the reserves.

Bedouins:

Bedouins are nomadic Muslims who were in Israel when modern borders were set in place and are now considered Israeli citizens. They are not required to draft but a growing number choose to enlist. In 2012, there were over 1,400 Bedouin Muslim soldiers doing regular IDF service and almost 1,500 in the reserves.

Read more:http://www.idfblog.com/2014/02/27/truth-idf-numbers-pictures/#more-34027

Are you aware that in 2013, Middle class taxes go up-significantly?

In January of next year, the federal income tax rate for middle-class taxpayers is scheduled to rise from 25 percent to 28 percent, and the payroll tax is scheduled to rise from 13.3 percent to 15.3 percent… This drives the marginal tax rate based on the aforementioned three taxes to 48.12 percent. Add in state and local property, corporate, excise, and other state and local taxes, and the percentage of each additional dollar that is taxed hovers around 50 percent… When half of each additional dollar earned is taxed away, taxpayers experience a disincentive to start businesses or expand existing ones. This leads to fewer jobs being created.

Why is HAMAS Inside Tampa Schools?

Clare Lopez

Kelly Miliziano, who teaches history classes at Steinbrenner High School in the Tampa, Florida area apparently thinks it’s perfectly OK to invite a senior official of a HAMAS-affiliated organization into her classroom to discuss Islam with her students. According to local media reports, not only has this been going on for years, but in spite of the civil and criminal proceedings that could result from such reckless negligence, the Hillsborough County school superintendent, Mary Ellen Elia, and the chairman of the school board, Candy Olson, also expressed approval for students under their responsibility to be exposed repeatedly to guest speaker, Hassan Shibly, who is the Executive Director for the Council on American-Islamic Relations (CAIR) in the Tampa area.
More...

Did You Know... Ignoring the Call to Islam will Bring Jihad

‘Conquest through Da’wa [proselytizing] that is what we hope for. We will conquer Europe, we will conquer America! Not through sword but through Da’wa.’
-- Yousef al-Qaradawi , Muslim Brotherhood spiritual leader The Arabic word ‘Da’wa’ means the “call to Islam.” But do not think that Da’wa is the same thing as an invitation to an optional holiday event. The classical Islamic doctrine of jihad mandates that enemies must be given the opportunity to convert to Islam or pay the jizya tax before it is permissible to attack them.
Clare M. Lopez

Who is being discriminated-facts tell the truth

Religious bias

Hate crimes motivated by religious bias accounted for 1,409 offenses reported by law enforcement. A breakdown of the bias motivation of religious-bias offenses showed:

65.4 percent were anti-Jewish.
13.2 percent were anti-Islamic.
9.5 percent were anti-other religion, i.e., those not specified.
4.3 percent were anti-Catholic.
3.8 percent were anti-multiple religions, group.
3.3 percent were anti-Protestant.
0.5 percent were anti-Atheism/Agnosticism/etc.

http://www.fbi.gov/about-us/cjis/ucr/hate-crime/2010/narratives/hate-crime-2010-incidents-and-offenses.

On March 31, 1977, the Dutch newspaper Trouw published an interview

with PLO executive committee member Zahir Muhsein. Here's what he said:

"The Palestinian people does not exist. The creation of a Palestinian state is only a means for continuing our struggle against the state of Israel for our Arab unity. In reality today there is no difference between Jordanians, Palestinians, Syrians and Lebanese. Only for political and tactical reasons do we speak today about the existence of a Palestinian people, since Arab national interests demand that we posit the existence of a distinct "Palestinian people" to oppose Zionism.

For tactical reasons, Jordan, which is a sovereign state with defined borders, cannot raise claims to Haifa and Jaffa, while as a Palestinian, I can undoubtedly demand Haifa, Jaffa, Beer-Sheva and Jerusalem. However, the moment we reclaim our right to all of Palestine, we will not wait even a minute to unite Palestine and Jordan."

In March 1977, Zahir Muhsein, a PLO executive, said:

"The Palestinian people does not exist. The creation of a Palestinian state is only a means for continuing our struggle against the state of Israel for our Arab unity. In reality today there is no difference between Jordanians, Palestinians, Syrians and Lebanese. Only for political and tactical reasons do we speak today about the existence of a Palestinian people, since Arab national interests demand that we posit the existence of a distinct Palestinian people to oppose Zionism."

"For tactical reasons, Jordan, which is a sovereign state with defined borders, cannot raise claims to Haifa and Jaffa, while as a Palestinian, I can undoubtedly demand Haifa, Jaffa, Beer-Sheva and Jerusalem. However, the moment we reclaim our right to all of Palestine, we will not wait even a minute to unite Palestine and Jordan."

The Arab Apartheid

Ben-Dror Yemini
In 1948, the Arab countries refused to accept the UN partition proposal and they launched a war of annihilation against the State of Israel which had barely been established. All precedents in this matter showed that the party that starts the war - and with a declaration of annihilation, yet - pays a price for it. Between 550,000 and 710,000 Arabs fled because of the war and a larger number of 850,000 Jews were expelled or fled from Arab countries (the "Jewish nakba").
Population exchanges and expulsions were the norm at that time, occurring in dozens of other conflict points and affecting about 52 million people. In all the population exchange precedents that occurred during or at the end of an armed conflict, there was no return of refugees to the previous region, which had turned into a new national state.
Only the Arab states acted completely differently from the rest of the world. Instead of assimilating the refugees, they crushed them despite the fact that they were their coreligionists and members of the Arab nation - instituting a regime of apartheid. So the "nakba" was not caused by the actual dispossession, which had also been experienced by tens of millions of others. The "nakba" is the story of the apartheid, oppression, abuse and denial of rights suffered by the Arab refugees at the hands of the Arab countries. (Maariv)

International Law and Military Operations in Practice - Col. Richard Kemp

"Islamist fighting groups study the international laws of armed conflict carefully and they understand it well. They know that a British or Israeli commander and his men are bound by international law and the rules of engagement that flow from it. They then do their utmost to exploit what they view as one of their enemy's main weaknesses. Their very modus operandi is built on the correct assumption that Western armies will normally abide by the rules, while these insurgents employ a deliberate policy of operating consistently outside international law. "

Lost Historical Moments

What Rabin’s last Knesset speech really said:repudiation of a Palestinian state

Rabin ruled out a fully sovereign Palestinian state :

“We view the permanent solution in the framework of State of Israel which will include most of the area of the Land of Israel as it was under the rule of the British Mandate, and alongside it a Palestinian entity which will be a home to most of the Palestinian residents living in the Gaza Strip and the West Bank. We would like this to be an entity which is less than a state, and which will independently run the lives of the Palestinians under its authority.”

Rabin ruled out a total withdrawal from Judea and Samaria and thus a return to the pre-June 1967 borders :

“The borders of the State of Israel, during the permanent solution, will be beyond the lines which existed before the Six Day War. We will not return to the 4 June 1967 lines.”

Rabin ruled out withdrawing form the Jordan Valley:

“The security border of the State of Israel will be located in the Jordan Valley, in the broadest meaning of that term.”

Rabin ruled out uprooting settlement blocs, like the Gush Katif bloc in Gaza (which was subsequently uprooted by former Prime Minister Ariel Sharon):

“The establishment of blocs of settlements in Judea and Samaria, like the one in Gush Katif.

AND

Rabin ruled out removing any settlement before coming to a full peace agreement with the Palestinians:

“I want to remind you: we committed ourselves, that is, we came to an agreement, and committed ourselves before the Knesset, not to uproot a single settlement in the framework of the interim agreement, and not to hinder building for natural growth.”

Rabin insisted on Israel retaining full security control of the borders with Egypt and Jordan, contrary to Israel’s relinquishment of the Philadelphia Corridor on the border with Egypt:

“The responsibility for external security along the borders with Egypt and Jordan, as well as control over the airspace above all of the territories and Gaza Strip maritime zone, remains in our hands.”

Correcting Oslo Myths-Part 2

3) Kuttab laments that the post-1993 Oslo process resulted in a Palestinian Authority "whose ministers and legislators are not guaranteed passage between Gaza and the West Bank ...."

Before free passage or other perquisites, PA leaders were obligated, among other things, to eliminate the terrorist infrastructure in the West Bank and Gaza Strip, end anti-Israeli, antisemitic incitement in schools, mosques, and communications media, and resolve all outstanding issues through peaceful negotiations. They met none of these commitments, sometimes bolstering terrorism and greatly increasing incitement.

4) Kuttab complains that under Oslo the PA got "lightly armed police ---- but no real sovereignty over the land or contiguity between our communities in Gaza and the West Bank."

Oslo agreements repeatedly were revised, regardless of Palestinian non-compliance, until the authorized number of police grew from 8,000 to 40,000. Though they were to be the only armed forces in the territories, Israeli estimates early in the second intifada put the number of gunmen - police, "security services," terrorists, and armed gangs - at 85,000. Their armament reportedly included not only heavy machine guns and rocket-propelled grenades, but also anti-tank and anti-aircraft missiles.

Sovereignty was to be negotiated in the envisioned 1998 "final status" talks - after a five-year period of confidence-building. Palestinian leadership chronically undermined the process. Palestinian terrorism made the 1993 - 1998 Oslo period more deadly for Israelis than the 15 years preceding it.

The United States doesn't have contiguity between the lower 48 states and Alaska and Hawaii; territorial contiguity between the West Bank and Gaza Strip - that is, through the 20 miles of Israeli territory between them - was never promised and would destroy Israeli contiguity.

5) "Palestinians have been made to endure hundreds of checkpoints in the West Bank, an eight-foot wall deep in our territories, and tight Israeli control over borders."

The security barrier is not "deep in Palestinian territories," but rather encompasses less than 8 percent of Judea and Samaria, and is mostly a fence, rarely a wall; the land in question is not "our [Palestinian] territories" but disputed territory to which, according to the authors of U.N. Security Council Resolution 242, Jews as well as Arabs have claims; and there are no international borders, only the 1949 armistice lines with Jordan. Under 242, borders remain to be negotiated. As for checkpoints - like the security barrier and "tight Israeli control" - Palestinian Arabs precipitated these measures themselves. No terrorism and there would be no fence or tight Israeli control and few checkpoints - like before the first intifada.

Correcting Some Oslo Myths

1) In Oslo "Israeli, Palestinian and other world leaders promised that ... Palestinian sovereignty would be solidified."

No, they didn't. The 1993 Declaration of Principles and subsequent Oslo agreements outlined a process by which final status negotiations about the West Bank and Gaza Strip would be reached. The process required an end to anti-Israel terrorism and incitement and a commitment to peaceful negotiations. The PA, Fatah, Hamas, Islamic Jihad, the Popular Front for the Liberation of Palestine, and other terrorist groups, sabotaged the process from the start.

2) "The reality is that, in defiance of U.N. Security Council Resolution 242, which states that it is inadmissible to occupy land by force, Palestinian territories are still under foreign military occupation."
Wrong again. Resolution 242 (1967) does note "the inadmissibility of the acquisition of territory by war." It also affirms the right of every state in the area "to live in peace with secure and recognized boundaries free from threats or acts of force." There were no "Palestinian territories." Jordan occupied the West Bank, Egypt controlled Gaza. Israel did not have "secure and recognized boundaries," so retention of some of those territories was possible under 242. Israel is not a "foreign" military occupier in the West Bank but, pending final negotiations, the lawful military administrator as a result of a successful war of self-defense.

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