Ukraine, Hungary, and Serbia are all in emergency talks with the International Monetary Fund, raising fears that an exodus of foreign investors will set off a systemic crisis across Eastern Europe.
A team of IMF trouble-shooters rushed to Kiev on Wednesay to draw up a possible standby loan to help Ukraine stabilize its bank after a panic run on deposits this month.
The outlook has darkened since President Viktor Yushchenko dissolved parliament in a dispute that threatens to anger the country’s Russian minority. Kiev and Moscow are at loggerheads over the Sevastopol base used by Russia’s Black Sea fleet.
Foreign investment has largely dried up, leaving it unclear whether banks with large debts in dollars and euros will be able to roll over short-term loans. The government has already seized Prominvestbank, suspending payments to creditors. The authorities have frozen all time deposits.
The plunge in steel and grain prices over recent weeks has made matters worse, hitting two of the country’s key exports. Zaporizhtal, MML Steel, and Donsetsk Steel are all slashing output.
“The global credit crisis is spreading to the most leveraged economies in the world,” said Danske Bank.
“Iceland was the canary. It was the first to need a helping hand from the IMF, but all countries that have had asset bubbles and rely on foreign funding are vulnerable,” said Lars Christensen, the bank’s East Europe expert.
The credit default swaps (CDS) for Argentina, Pakistan, and Ecuador are flashing warnings of insolvency, while the Baltic States, Romania, Bulgaria, and Turkey are at risk as it becomes harder to finance current account deficits.
“This is turning serious,” said Hans Redeker, currency chief at BNP Paribas.
“Countries in Eastern Europe have been living beyond means for years and now they face a full-blown credit crunch. They are going to have to cut back on imports and that will push the eurozone deeper into recession,” he said.
“We think the next phase will be an attack on the currency pegs in the Baltics and Bulgaria,” he said.
Hungary may soon become the first EU state to need an IMF bail-out since Britain’s loan in 1976. Premier Ferenc Gyurcsany said he was in close talks with the fund but viewed financial aid as a “last resort.”
The forint plummeted 5pc yesterday as panic swept the Budapest markets, inflicting more pain on those with large debts in Swiss francs and euros.
More than 80pc of mortgages issued over the last two years have been in foreign curencies. Borrowers have been lured by low rates, ignoring the exchange risk.
Raiffeisen Bank, Volksbank, and Bayerische Landesbank, have all ordered their Hungarian subsidiaries to stop lending in foreign currencies in recent days.
Ukraine’s currency fell to a record low last week, forcing the central bank to intervene. Fitch Ratings said Ukraine’s red-hot credit growth of 74pc last year had led to overheating, leaving the banks vulnerable as the boom deflates. The cuurent account deficit is expected to reach 7pc of GDP next year.
Commerzbank said the escalating political crisis in Ukraine was manageable in the boom years when foreign funds were pouring in. “Those days are long gone,” it said.
By Ambrose Evans-Pritchard
Last Updated: 10:16PM BST 15 Oct 2008
Source: The Telegraph