Emergency action is needed to support free-falling currencies and high debt levels in central and eastern Europe, Herbert Stepic, chairman of Raiffeisen International has said.
Steps are needed in monetary policy, and in the banking system, to reduce the risk of a hard landing for economies in the region, Stepic told Emerging Markets yesterday.
Stepic is concerned that plummeting local currencies will paralyze efforts to service the large stock of foreign-currency debt and present significant contingent liabilities for sovereigns.
He called for a freeze of foreign currency borrowing on the consumer side as well as a curb on mortgage loans in foreign exchange.
Consumers and corporates have in recent years binged on cheap global credit, contributing to massive debt levels and external imbalances. Bulgarian and Estonian external debt is currently 101% of GDP, while Hungarys debt stands at 96%.
Local subsidiaries of Swedish, Austrian and Italian banks have largely funded the consumer spending and private investment boom that has powered regional growth. Now the global credit party is over, and a dramatic cutback in funds from parent banks is on the way.
Stepic urged monetary authorities to boost liquidity by loosening bank reserve requirements and lowering borrowing costs as inflationary pressures wane.
He says governments in the region should intervene to stop a potential wave of asset liquidation as corporates and consumers are overwhelmed by the liquidity crunch. You should not really hound defaulters into court since they are just victims of the global crisis.
He argues that in free-floating exchange rate regimes as in Romania central banks need to try and take control of currencies by aligning themselves with the IMF and EU authorities more closely which would be a short-term market-confidence builder. Stepic stopped short of suggesting the country should adopt a currency board pegged with the euro.
Nevertheless, he conceded that the fate of regional economies lies in the effectiveness of Western policy efforts to introduce confidence and liquidity in the international financial system.
The IMF predicts that central Europes economies will expand by an average of 3.6% next year, Baltic states will remain in recession, and Romania and Bulgaria will continue to expand as their economies catch up with their richer counterparts in the region.
Stepic argued the current crisis would help to reduce the regions heavy reliance on external financing in the next two years. The IMF estimates the collective trade imbalance in the region will be a 7.2% deficit this year double 2002 levels. Stepic, a pioneer banker in the region, was bullish on the region going forward. The mid to long-term outlook is as good as ever and there are still plenty of opportunities.