Europe’s Russian Connections

By Aasim M. Husain, Anna Ilyina and Li Zeng

(Version in Русский)

The conflict in Ukraine and the related imposition of sanctions against Russia signal an escalation of geopolitical tensions that is already being felt in the Russian financial markets (Chart 1). A deterioration in the conflict, with or even without a further escalation of sanctions and counter-sanctions, could have a substantial adverse impact on the Russian economy through direct and indirect (confidence) channels.

Chart 1

CESEE-Blog_7-30-14_final.001

What would be the repercussions for the rest of Europe if there were to be disruptions in trade or financial flows with Russia, or if economic growth in Russia were to take a sharp downturn? To understand which countries in Europe might be most affected, we looked at the broad channels by which they are connected to Russia—their trade, energy, investment, and financial ties. See also separate blog on Russia-Caucasus and Central Asia links.

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Taking Away the Punch Bowl: Lessons from the Booms and Busts in Emerging Europe

By Bas B. Bakker and Christoph Klingen

With all eyes on the euro area, it is easy to forget that only a few years ago the emerging economies of Europe, from the Baltic to the Black Sea, went through a deep economic and financial crisis. This crisis is the topic of a new book that we will introduce to the public this week in Bucharest, London, and Vienna.

One lesson is that your best chance to prevent deep crises is forcefully addressing booms before they get out of hand. Another is that even crises that look abysmal can be contained and overcome— policies to adjust the economy and international financial support do work.

In the half decade leading up to the crisis, easy global financial conditions, confidence in a rapid catch-up with western living standards, and initially underdeveloped financial sectors spawned a tremendous domestic demand boom in the region. Western banking groups bankrolled the bonanza, providing their eastern subsidiaries with the funds to extend the loans that fueled the domestic boom. Continue reading “Taking Away the Punch Bowl: Lessons from the Booms and Busts in Emerging Europe” »

Lessons from Latvia

Four years later, Latvia has one of the highest growth rates in Europe, the peg has held, and the fiscal and current accounts are close to balance. Preparing for the conference I just attended in Riga in which we tried to draw lessons, and reading the evidence, I could think of seven reasons.

Latvia Beat the Odds—But the Battle Is Far From Over

The Baltic country of Latvia has gone through the most extreme boom-bust cycle in emerging Europe, and was among the first countries to ask for financial assistance from the international community. Today, it is one of the fastest growing economies in the European Union. Real GDP grew by 5½ percent in 2011, and is now projected to expand by 3½ percent in 2012, a number that possibly will come out even higher. Latvia has also successfully returned to international capital markets.

Debt Hangover: Nonperforming Loans in Europe’s Emerging Economies

In emerging Europe, the share of loans classified as nonperforming—many of them household mortgages—have exploded from 3 percent before the crisis to 13 percent at the peak. NPLs in some parts of the Baltics and Balkans are already at par with previous financial crises elsewhere. Our analysis finds evidence that nonperforming loans are indeed a serious drag on credit supply and economic growth. They drive up banks’ funding costs and interest margins, and at the same time drain their profits and capital. On the credit demand side, over-extended households and businesses are reluctant to consume and invest.

Toughing It Out: How the Baltics Defied Predictions

The three Baltic states—Estonia, Latvia and Lithuania—were among the first victims of the global financial crisis. Although adjustment is still far from complete, a recovery is now underway. It is still too early to judge the success of the Baltic strategy, but it's fair to say that the most dire predictions have not come true.

By | January 7th, 2011|Economic Crisis, Emerging Markets, Employment, Fiscal Stimulus|11 Comments

Reigniting Growth in Emerging Europe

Following the global economic crisis, Europe's emerging economies will need to find new sources of growth to increase their share of world markets. Marek Belka, head of the IMF's European Department, says growth will need to come from manufacturing and services, rather than, in the past, construction, real estate, and banking. But he argues that Emerging Europe has transformed itself many times before and is quite capable of doing it again.

The Global Crisis and Emerging Europe: Why the Script Differs from the Asian Crisis

By Ajai Chopra

When the global financial crisis spread to emerging Europe in the last quarter of 2008, memories of the Asian crisis of the late 1990s sprang back to life. Would emerging Europe face the same chaotic currency depreciations, mass defaults of banks and companies, double-digit output losses and social unrest that beset several Asian countries back then?

Nine months into the crisis, it is clear that emerging Europe as a whole is not following Asia’s script. But it is also clear that the crisis is evolving differently across countries.

The Baltic countries (Estonia, Latvia and Lithuania) are suffering output declines that already exceed those of the Asian crisis (see chart below).

Chopra4Chart1

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By | August 19th, 2009|Economic Crisis, Emerging Markets, Financial Crisis, IMF|2 Comments
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