Europe's financial crisis is spreading eastward
Hungary and Ukraine received emergency loans from the IMF Sunday. Belarus and Serbia are asking for help, too.
A rapidly mounting currency crisis within Eastern Europe is threatening to spill across the wider European Union, an event that could spark a second epicenter in the global financial crisis, economists say.Skip to next paragraph
Subscribe Today to the Monitor
The IMF loan helped stabilize Hungary's currency on Monday. But many Eastern European currencies have fallen as much as 25 percent against the dollar and euro. The euro's own devaluation of late is part of the problem.
The euro hit a two-year low against the dollar Monday, reflecting new concern that Western European banks are too exposed to the emerging economies of Eastern Europe, having lent heavily to many when they joined the European Union (EU) in 2004.
With currencies there diving, and credit drying up overall, the fear is that these countries will soon not be able to finance their debts, threatening Western Europe with large losses.
Economists say the currency panic recalls the "Black Wednesday" collapse of the European Exchange Rate Mechanism 18 years ago. Neil Mellor, an analyst at Bank of New York Mellon, told London's Daily Telegraph Sunday, "This is the biggest currency crisis the world has ever seen."
So, the IMF is stepping in to help some countries finance their debts. On Sunday, the IMF closed bailout deals with Ukraine and Hungary, agreeing to loan Ukraine $16 billion and Hungary an unspecified amount that's likely to be more than $10 billion, say some analysts. Belarus is asking the IMF for a $2 billion loan, and Serbia is expected to make a formal loan request soon; an IMF team arrives in Belgrade Wednesday to begin talks with the government.
Eastern European economies that only a month ago seemed fundamentally sound are now foundering, not because of toxic mortgage loans as in the United States, but rather because of the credit crisis' impact on capital markets. Governments in the region borrowed and spent heavily to improve institutions and infrastructure ahead of European Union membership.
After joining the EU, foreign investment poured in, property values soared, housing markets boomed, and ordinary consumers found themselves with access to credit that was unthinkable during the dark days of communism.
The Baltic countries, Romania, and Bulgaria have current account deficits – the net flow of goods, services, and transactions between countries – in double-digit percentages to their gross domestic products (GDP). Hungary's public debt is now roughly 60 percent of its GDP.