Growth In Eastern Europe Now A Dream Deferred

By: By RYAN LUCAS
By: By RYAN LUCAS

WARSAW, Poland (AP) - The financial crisis has tightened its
grip anew on eastern Europe, bringing the ex-communist countries'
once-high flying economies to a standstill - and putting on hold
dreams of catching up with the richer nations of western Europe.

Robust growth in recent years put Porsches on the streets of
Riga and dotted Warsaw's skyline with sleek new skyscrapers. Now,
eastern Europe's economies suddenly face plunging growth figures
and a looming currency crisis.

Central banks, which face rate decisions next week in Poland and
the Czech Republic, are caught caught between raising interest
rates to support crumbling currencies or lowering them to save
jobs.

"These are really stormy times," said Ryszard Petru, an
independent economic analyst in Poland.

"We now do hear more and more voices that a currency crisis is
here," said Maja Goettig, the chief economist for BPH Bank in
Warsaw.

The Baltic states are in perhaps the worst shape. On Wednesday,
Latvia's Finance Ministry announced its economy will shrink 12
percent this year, a huge downward revision from an already bleak 5
percent decline. The country has already received a massive bailout
from the International Monetary Fund.

In neighboring Estonia, the economy contracted 9.4 percent in
the fourth quarter from a year earlier. The crunch is all the more
painful after years of economic growth that soared as high as 10.4
percent in 2006.

Hungary and Ukraine, both with huge budget deficits, have also
gotten IMF loan bailouts, while the Russian banking system is
staggering.

Even Poland, which many analysts still expect to post positive
growth this year, has had to cut its estimates from around 3.7
percent to 1.7 and find savings of almost 20 billion zlotys (19.7
billion zlotys ($5.5 billion) in the 2009 budget.

How did poster children for capitalism become a subprime
neighborhood? Heavy foreign and local borrowing helped put
countries like Ukraine and Latvia in the hole. Now, even the more
prudent, like Poland and the Czech Republic, are caught in the
downdraft. The region's currencies are taking a battering as
foreign investors take their money and run for the exits.
Meanwhile, local demand is slipping.

Poland - the largest of the former communist countries that
joined the European Union in 2004 - has been the hardest hit,
seeing the zloty drop 15 percent in 2009 alone to 4.9 against the
euro.

The crisis that has left governments, businesses and workers in
the region reeling comes after boom years that saw the eastern
European countries make giant strides since shedding communism some
20 years ago. Buoyed by close ties with Scandinavia, the Baltic
states closed the gap with the richer countries of western Europe
the fastest.

Between 1997 and 2008 Estonia's GDP per capita jumped from
around 42 percent of the EU average to almost 65 percent; Latvia's
bounced from 35 percent to 56 percent; while Lithuania's rose from
38 percent to almost 60 percent.

Poland and Hungary's gains were not as large but enough to bring
overseas vacations and new apartments within reach of many ordinary
people.

Now those growth rates have evaporated and some forecasters are
predicting that the region could see output slide by up to 10
percent this year.

Neil Shearing, an emerging markets economist at Capital
Economics, thinks eastern Europe could see output contract by
between 5-10 percent in 2009 as it suffers what he termed a
"sudden stop" in financing as international investors take their
money out.

Under normal circumstances the prospect of such a deep recession
should lead to lower borrowing costs but the pressure on the
region's currencies has led policymakers to indicate that the pace
of rate cuts may have to slow in the months ahead.

Hungary and Poland's central banks are expected to keep their
interest rates on hold next week at 9.5 percent and 4.25 percent
respectively, while in the Czech Republic, rising concerns about
the fall in the koruna has even raised speculation that interest
rates may actually go up next month from the current 1.75 percent -
to the likely further dismay of many Czechs.
---
AP Business Writer Pan Pylas contributed to this report.


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