Who created the financial turmoil in Eastern Europe

February 25, Poland's central bank announced currency zloty (PLN) against the U.S. dollar rose to 3.6312:1, the exchange rate against the euro rose to 4.659:1. One in Poland on condition of anonymity, told our reporter Chinese businessmen: zloty against the U.S. dollar last week fell to a minimum of 3.9, Polish Prime Minister to speak out immediately stabilize the exchange rate is also only a slight rebound.

The businessman regularly required U.S. remittances to the domestic parent company, in the past few weeks, he found: the sharp exchange rate zloty diving, give him a big loss on exchange. He said, "Every domestic sinks to a sum of money, basically have to七八万loss zloty (about 1 yuan zloty 0.535)."

In Eastern European countries, a large number of ordinary people with the Chinese businessmen, the day fixed the exchange rate, because exchange rate movements directly related to their livelihood at stake. At present, the vast majority of people in Eastern European countries, bank loans in euros, Swiss francs and other foreign currency-denominated, the devaluation of the currency means that the rapid expansion of their liabilities.

"For Eastern European countries, such as small economies, the banking industry not the cause of excessive openness of the key reasons for this crisis, the most direct reason is the large number of non-rational foreign currency loans." Chinese Academy of Social Sciences, the Russian Institute of Eastern Europe and Central Asia Eastern European Research Office孔田Ping told this newspaper.

Foreign currency loans and prosperity: a hidden exchange rate risks

Ping孔田told our reporter, Eastern Europe in recent years local economic development to a large extent driven by the credit growth. "At present, the principal of loans in Eastern Europe are issued in euros or Swiss francs, not only has corporate loans, including the large number of consumer credit."

"Eastern Europe the Czech Republic, Poland, Hungary and Estonia four current floating exchange rate system, Hungary and Estonia's foreign exchange line of credit is very high, so they are now facing a larger problem." Located in Brussels, the economic think-tank BRUEGEL researcher told the Zsolt Darvas Daily News reporter.

Darvas in a report noted that Latvia, Estonia, the proportion of foreign currency loans has exceeded 80 percent, Bulgaria, Lithuania, Romania and Hungary more than 50%, the best situation in Poland and Slovenia have already exceeded 20%.

Eastern European countries, why people prefer foreign currency loans? The reason is clear - in foreign currency lending rates lower than a lot of local currency loans. Such as in Hungary, according to孔田-ping said that in 2006 the country's 90% of the mortgage loans issued in Swiss francs, the interest rate than the local currency forint lower by 50%.

These foreign currency loans, mainly from Western Europe, the bank branches in Eastern European countries. In fact, the current Eastern European countries, the vast majority of market share in the banking industry has been occupied by Western European banks. Major international rating agencies Moody's statistics show that foreign investors in Eastern European countries, the ratio of the banking industry have been holding close to 80 percent, the Czech Republic, Slovakia and Estonia's capital ratio of the banking industry even more than 90%.

In the control of the majority of market share under the premise of why the Western European banks are willing to provide low interest rate, foreign currency loans? Western European countries with long-term low interest rate policy can not be separated from Western Europe Eastern Europe issued by banks in foreign currency lending rate is significantly lower than the local currency lending rates, but still higher than those of Western European banks in their lending interest rates. In the capital driven by profit-driven nature, the natural shift substantial foreign currency loans in Eastern Europe.

The cost of cheap foreign currency loans for economic growth in Eastern Europe provides a strong driving force. Steady growth in the global economy, the lending profitable to both sides.

But at the time of economic prosperity, the people of Eastern Europe could not noted a low interest rate foreign currency loans to hide under the cloak of exchange rate changes.

In 2004 and 2007 after the two batches to join the European Union, Eastern Europe most countries have formulated a timetable for accession to the euro zone. This is expected, but also promoted the Eastern European countries, the trend of the currency has appreciated. This led to more people in Eastern Europe in order to select the local currency revenues to repay foreign currency loans, thereby neglecting the risk of currency devaluation.

For instance, Poland is May 1, 2004 after joining the EU in the euro zone is expected to add impetus, the zloty exchange rate against the euro in April 2004 from 4.8122 in the beginning all the way to maintain the appreciation trend in the July 25, 2008 reached record high of 3.206.

Withdrawal of funds: net capital inflows fell sharply

The spread of the global financial tsunami triggered those floating exchange rate system of the Eastern European country of the currency exchange rate fell Express. According to Statistics Denmark danske bank, with the August 1, 2008 compared to January 2009 the Czech Republic, Romania, Hungary and Poland in Central and Eastern Europe a few major economies of the currency exchange rate against the euro has shrunk 10 percent over all, the depreciation of CZK nearly 15 percent, the most serious Polish zloty devaluation of nearly 30%.

This allows Eastern European countries have been expected that the currency appreciation of enterprises and the public by surprise.

Remove speculative factors, exchange rate movements with a country's capital account is closely related to the health status. This includes foreign exchange reserves, current account and short-term external debt of three main factors.

Moody's to an external vulnerability index, to measure when external funds dried up when a country's economic vulnerability. The index of a country are short-term foreign debt, the long-term external debt would mature during the year, non-national population of more than one year's savings and, with the official foreign exchange ratio limit. According to November 2008 data, this index of the highest in Estonia, and nearly 400%; Latvia, Hungary, Lithuania, Poland, Slovakia, Romania and Bulgaria are in the index 100% to 300%, and only the Czech Republic less than 100% .

Eastern European countries exist in all current-account deficit, while Bulgaria, Romania and the Baltic States (Latvia, Lithuania and Estonia) have reached double-digit deficit, one of Bulgaria or even exceeded 20%.

In external debt indicators, the country's external debt in Central and Eastern Europe accounted for the proportion of GDP is higher than almost all emerging economies. In 2008, the debt GDP ratio accounted for more than 50% of the country almost all from Eastern Europe, in Latvia one of the highest, reaching 135 percent, Bulgaria, Estonia and Hungary are also 100 percent more than the warning line.

According to Institute of International Finance (IFF) of the prediction, Central and Eastern European countries have been facing an imminent threat. IFF forecast net capital inflows in 2009 fell sharply in the last year, has around 254 billion euros of net capital inflows, while the 2009 only has 30 billion euros.

Darvas, told this reporter that the net capital inflows in Eastern Europe mainly come from the reduction in the stock market and bond market funds withdrawal.

Darvas has served as the Hungarian central bank's deputy director of the Research Department. For him to Hungary, Hungary a large part of the bond market are run by non-national residents or institutions to hold, before the recent crisis, the proportion of its holdings to around 35 percent, and now less than 25%.

But also in the European Central Bank for the mortgage assets in bonds, not including non-euro area, the new EU countries, local currency bonds. This allows these countries to further loss of the attractiveness of government bonds, leading to a liquidity shortage in the circumstances of the sale.

Take the initiative to lift the exchange rate of the firewall

"If Eastern Europe is also less in 1989 as the financial markets closed, this will not be such a big impact."孔田Ping said.

However, Eastern European countries, the opening up of financial markets to join the European Union are one of the basic conditions. Central and Eastern European countries on foreign banks opening up the basic attitude of mind completely, so the bank took control of Western Europe, Central and Eastern European banking average of about 85% of asset value. Central and Eastern European countries the majority of bank assets, 60% were of Western European banking industry control, Slovakia and Estonia was almost 100%.

To Hungary as an example. Since Hungary has joined the European Union, in financial flows freely under the principle of whether or not during the acquisition of Bank of Hungary, are not unlimited. Darvas said, "Hungary was poor management of state-owned banks, has a lot of corruption and bad debts, the privatization of the banking system are domestic consensus, but then there are no sufficient funds, only to rely on foreign capital."

Thus, in the Eastern European countries, the privatization process, the Western European banks through mergers and acquisitions the way, and gradually took control of the banking market in Eastern Europe.

Open financial markets, relaxation of capital controls to allow access to Eastern European countries, the corresponding returns.孔田Ping said, "After the foreign banks to enter the Central and Eastern Europe in the past ten years to enjoy a high growth rate and the outcome of European integration."

However, in order to truly integrate into the European Union, the European integration in the market, exchange rate hedging advantages and Eastern European countries must go through to join the European Union, the Schengen States, the euro area three steps.

May 1, 2004, Poland, Hungary, the Czech Republic, Slovakia, Slovenia, Estonia, Latvia, Lithuania and other Eastern European countries join the European Union, while Romania and Bulgaria also followed on January 1, 2007 to join the European Union. December 21, 2007, Poland, the Czech Republic, Estonia, Lithuania, Latvia, Malta, Slovakia, Slovenia and Hungary officially became a "Schengen Agreement," Member States.

But so far, Eastern European countries, only Slovakia in January 1 this year, the first to join the euro zone. Most Eastern European countries in the relaxation of capital controls, exchange rate take the initiative to lift the firewall, the euro has not been present this new firewall protection.

In this case, the global financial tsunami brought about by capital flight, exchange rate fluctuations, such as a series of financial changes, given the larger Eastern European countries caused by turbulence.

"Foreign banks are two sides of the same coin"

At present, by the financial turmoil and global economic recession, the Bank of Western European countries still need to rescue the country, people can not help but worry whether these central banks will abandon their country in Central and Eastern Europe branch, causing the collapse of the banking sector in Central and Eastern Europe.

However, Darvas think, in fact in the short term, this back-largest bank in Western Europe the situation for the banking sector in Central and Eastern Europe are one-fu thing, because performance and reputation to consider, Western Europe, large banks will still provide support for the branches, "Otherwise, in Central and Eastern Europe may have been large-scale bank went bankrupt."

European Bank for Reconstruction and Development, chief economist Eric伯格洛夫also hold the same view, "Western European banks in the region have contracted the support of signs, but the support is continuing." For example, in the European Bank for Reconstruction and Development to provide loans to Ukraine, there are nearly two billion U.S. dollars of the funds are committed to providing the foreign banks.

In fact, Western European governments did not exclude foreign branches of domestic banks to the rescue. For example, in the Baltic countries the banking sector occupies an important position in Sweden, the United Denmark, Finland and Norway, the Nordic countries, a total of 1.8 billion euros of assistance.

"However, foreign banks are two faces of a coin. In the long term, credit crunch there are still foreign-funded banks to drastically reduce the risk of branches of credit", Darvas warned that apart from the funds of the nervous factors, because these banks to accept substantial national government financing and guarantee support, facing pressure from all sides will be more apparent, "they would in the domestic capital accumulation, or loans to the domestic, rather than to support the overseas branches."