Article
--- Ivailo Kalfin, Deputy Prime Minister and Minister of Foreign Affairs of Bulgaria
The rapidly weakening economy in Eastern Europe caught broad attention at the G20 summit, which just wrapped up in London. The zloty fell to its lowest level since 2004 when Poland joined the European Union. Hungary’s forint also hit a record low. Plunging currencies have dragged Eastern Europe into the center of the current financial crisis, where they have little capacity to deal with it. How deep will the recession go in Eastern European countries? Will the recession trigger a west-east divide in the EU?
Guest profile
Ivailo Kalfin is Deputy Prime Minister and Minister of Foreign Affairs of Bulgaria since August 2005. Before that, he was an economic advisor to the President of Bulgaria.
Crisis in Eastern Europe
Q: As we face a global economic downturn, one of the most serious problems we have observed in Eastern Europe is the plunging currencies. To what extent is this influencing people’s daily life in the region?
K: In Bulgaria, we don’t have the problem. Because in Bulgaria we have a particular monetary system which is the currency board arrangement, which means that the Bulgarian currency is fixed. The exchange rate is fixed to the Euro. That particular exchange rate to which requires quite a lot of reserves, that’s why we are running a surplus in budget for the last 7, 8 years, accumulating conditional reserve. So in Bulgaria, there’s no question about the stability of the national currency.
Q: What about your neighboring countries?
K: For our neighbors, for many of them, their national currencies have been depreciated.
Q: What’s the reason behind?
K: That’s an automatic stabilizer of the economy. Because when you depreciate your currency, you practically increase the potential for export, for keeping the markets. But at the same time, creating inflation in the country and you make the life of everyday people harder. So again, that’s one of these automatic stabilizers, which is affecting free floating exchange rate system. I think that this is something which is creating problems mainly for the budget of these countries. They are running huge deficits.
Eastern Europe was once a booming investment destination. Western European banks have lent a total of 1.7 trillion dollars to Eastern Europe, 400 billion US dollars of which must be repaid this year.
Q: And with the depreciating currencies, it might be more difficult for these countries to repay the debts onto these Western European banks and this may lead to the collapse these western banks.
K: That is absolutely right and then there’s another problem which is making that problem even more serious, is that it’s much more difficult to roll over some of this lending. They have much which is expiring sometime. That is true, but at the same time the western banks have made quite a lot of money in Eastern Europe in the last years. In Bulgaria, we have the example of 80% of the banking sector is hold by large European banks. And on top of that, again, that’s part of the decisions of the European summit, there’re no restrictions of the European banks whenever they are supported by their national governments to support their subsidiaries in the other member states in the EU. I think that no one has the interest, neither the parent banks, nor the governments, not the banks themselves in Eastern Europe to do whatever, which would create problems. In Bulgaria, the banks are absolutely able to function normal. They have decreased the lending. And this is one of the problems. I mean they are not able to return that much capital to markets that are making profits and they were making profits for 10 years. Again, I think that, of course in this situation, you never know what’s going to happen. It has to be a really deep financial and economic crisis so that we talk about structural problem, a systematic problem in the banks.
Some analysts have compared the financial crisis in Eastern Europe to Asia’s financial crisis in 1997. In both instances investors fled, and the currency worth dropped, but some say the current Eastern European financial crunch could have a bigger impact across the world.
Q: What is your general outlook on the recession in Eastern Europe? Some people even say this crisis will lead to a worse consequence than in 1997. What is your prediction?
K: Many people compared this to the depression of 1929, which is much worse than what happened on the Asian market. I think what happened to the Asian market is very much related to some overvaluation of the assets on the stock exchanges. This is not the case in Eastern Europe and in Europe at all. This crisis started with a financial problem in the US with low consumption and with many bad assets, it went into the European countries with the exposure of the banks in American investment instruments. And we have the major effect not in the banking sector, but again, in the market, in the export market of the country. And the countries that have less reserves and that are running deficit in the budget are more vulnerable, that’s why they have macroeconomic problems. So that’s a totally different nature of this crisis. If it is not properly managed, it might have much more devastating consequences, but again, as far as at least in central Eastern Europe, the biggest problems are in the government financing and I think there are enough funds for covering these problems. And second, this is with the shrinking market, which is going to shake the economy. But again, markets are not disappearing, they are decreasing.
Q: I understand it’s very hard to make predictions at this point of time, but I still want to ask, when do you think Bulgaria or Eastern Europe as a whole region can come out of this recession?
K: Bulgaria as well as the other eastern European countries I would say, that in the last years, it’s becoming more and more difficult to make difference between new members, Eastern Central, Eastern Europe and old members of EU. The situation depends very much on the global economic situation. I mean, if we see destabilization first coming into the US, if we see the return of the confidence because that’s a crisis of confidence mainly in the core of the crisis. If we see this return of the confidence, then we can see very rapidly this country is recovering.