Cold wind of recession blows into east Europe

Publish date: 03-11-2008
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Ask Romanian pensioner George Iedan to list the benefits of western-style liberal market economics and he would do no more than show you round his communist-era flat.

Iedan and his Hungarian-born wife, Barbara, share a modest two-room flat with a kitchen and bathroom. They live in Timisoara, a city that has profited from an inflow of western money and industry and counts itself well off.

By Romanian standards the flat has made them unbelievably rich. Since they bought it six years ago its value has appreciated by 700%.

Old age and infirmity are forcing them to move and they expected to get a comfortable sum for their twilight years. But the global financial crisis now sweeping through eastern Europe has claimed Romania as its latest victim, leaving them high and dry.

An overblown economy built on a credit boom and run by a barely functioning government is on the point of collapse - much like its neighbour Hungary, which last week was forced to go cap in hand to the International Monetary Fund. Romanians stand next in line for the bankers' version of a Red Cross parcel, as do the Baltic states.

The Iedans, in their eighties, spent most of their lives suffering under the perverse version of socialism practised by the dictator Nicolae Ceausescu.

Now they face a new form of misery, that imposed by the free market.

"We are no longer mobile and need a ground-floor flat. I'm kicking myself for not selling last year," said Iedan. "Instead, I did what other people were doing and hung on, hoping that the value would go up. But nobody wants to buy at the moment. The banks won't lend the money. New flats and houses stand empty everywhere now."

The couple bought the flat for the equivalent of €10,000 (£8,000). It was built in the days of the Ceausescu regime when the authorities reckoned that lifts were too good for the country's workers so none was installed. But for the old couple the stairs have noq become a climb too far.

Last year the flat was valued at €80,000. "We have brought the price down to €60,000 and still nobody has the money or is willing to risk ownership in a falling market. I don't know how low we will go," said Iedan.

A Romanian estate agent said that the crisis had left him "completely exhausted" and lacking the will to carry on.

The Romanian housing boom reached ludicrous levels in a relatively poor country. Housing costs per square metre in the capital, Bucharest, are between €4,000 and €5,000, making Romania more expensive than Austria and twice as expensive as Germany.

Leading economist Nicu Taran said: "Public debt in Romania is €14 billion but dwarfed by private debt of €50 billion.

"The government faces a serious recession, rising unemployment and inflation. We have elections within a month, which will leave the government further weakened and the prospect of the crisis getting worse."

Taran describes the government as dysfunctional.

"We have no reason here for optimism. The price of goods is going up, with inflation reaching 8%, and our competitive-ness is going down. We have a demographic problem in our country with an ageing population and large numbers of young, talented people who are emigrating to western Europe and America," he said.

In neighbouring Hungary the government briefly stared into the pit of bankruptcy. The country's public debt amounts to a mind-boggling 93% of gross domestic product with an ever-widening current-account deficit.

Since 2006, when Prime Minister Ferenc Gyurcsany was caught on tape candidly admitting that he had lied about the economy in order to get himself reelected, the country has been in political stalemate.

Gyurcsany presented himself as a national saviour and pleaded that the crisis was too serious to call elections to end the impasse of running a minority government.

Instead he called a national summit that descended into bickering even though there was a run on the forint and insolvency looming.

Within 10 days the Hungarian national bank raised interest rates by three percentage points. The subsequent prospect of bankruptcies, unemployment and loan defaults led one analyst to claim "the economy is toast".

At that moment Matthias Sandfort, a real-estate executive with Helaba Landesbank, was guest speaker at a Budapest economic forum along with the IMF's Christoph Rosenberg, responsible for central Europe.

"Back in June when the invitations went out, the conference title of Tropical Storm seemed a bit playfully ironic. It's not a storm but a tsunami. The mood of the delegates was a feeling of despair," he said.

Rosenberg told the conference: "This [global crisis] may be the catalyst we have been looking for."

Shortly afterwards the IMF announced a €20 billion loan with the claim that the Hungarians had put "appropriate measures" in place to ensure stability and growth. In short, this cancelled the 2009 budget.

Worried about the flight of money, the Hungarian government has imposed a ban on all capital transfers out of the country.

The property market, which was built on foreign loans from European banks, has consequently seized up.

"Who would have thought it of an European Unon member country to impose such a ban? This is the worst worst-case scenario imaginable," said one bank executive.

The prime minister's ability to push through economic reforms remains to be seen.

At least Gyurcsany has progressed from telling economic fairy stories to committing himself to what he called "recession reality", having announced a freeze on salaries and bonuses for people employed in the public sector, and cancelling proposed tax cuts.

It seems a characteristic of the financial crisis that governments deny difficulties or claim to be well placed to weather the storm.

The IMF warned the Baltic states 18 months ago to end the pervasive "buy now, pay later" mentality. There was, said the IMF, "an urgent need for decisive action" to curtail domestic demand. Latvia, Lithuania and Estonia have barely scratched the surface of the problem of what one analyst described asa "loan festival".

An EU-wide recession will reduce domestic demand but inflation, current-account deficits and currency imbalances have not been tackled.

"The same recipe is good for the Baltic states as it is for Hungary - spending cuts, wage curbs and preventing wild currency speculation, said Krisztian Szabados, director of the research group Political Capital. "Whether they will call for help from the IMF I would not care to say."

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