[...]Austrian Banks The Most Exposed To Eastern Europe Forex Lending | afoe | A Fistful of Euros | European Opinion[...]…

[...]Austrian Banks The Most Exposed To Eastern Europe Forex Lending | afoe | A Fistful of Euros | European Opinion[...]…

[...]Austrian Banks The Most Exposed To Eastern Europe Forex Lending | afoe | A Fistful of Euros | European Opinion[...]…

I also think there is a lack of realism in Eastern Europe right now, about:

a) how serious the economic recession is right across the EU12 economies

b) how hard pressed the eurozone itself is right now. The number one priority is going to have to be avoiding Greece – who just had a downgrade from S&P – rocketed out at one end, and I seriously doubt they are going to be in any position to consider new applications from the East for some considerable time.

I think it is very unfair that they aren’t making this plain to you all. Apart from Greece, there are serious issues in Italy, Spain, Portugal, Ireland and now Greece. I mean, think about it for a minute. There are just not the resources to put all the fires out.

That is why, in my opinion, Hungary and Latvia were sent over to the IMF field hospital, the EU one is already running short of beds.

I understand what you are saying, but the problem is that before entering the eurozone they need to recover export competiveness, otherwise they will just end up, at best, as more Portugals, with unsustainable health and pension systems since the stagnation will not offer them the growth they need to pay the elderly dependence.

So either you have a sharp devaluation of the forint, or you have several years of difficult wage and price cuts. Dominique Strauss Kahn was in Budapest only this week to stiffen the resolve of your government on this latter approach which is what they signed up for when they took the loan.

But from the point of view of the foreign banks there is no difference, the defaults will come, and the home countries (in this case Austria) will need to have the bank bailouts (up to 70% of GDP in this case) ready.

As Paul Krugman made clear I think, whether or not to devalue or to cut wages and prices is a domestic issue, but the end result for the external banks is the same, with the only difference that in the case of deflation even HUF denominated loans are affected:

As Hugh points out, the proposed alternative — sharp wage cuts, and basically a major domestic deflation — will also make it hard to service those debts. In fact, I’d be a bit more specific than Hugh: other things equal, a nominal devaluation and a real depreciation achieved through deflation should have exactly the same effect on debt service (unless some of the debt is in lats rather than euros, in which case devaluation would do less damage.)

Fortunately in the Hungary case the percentage of non CHF recent mortgages (where most of the distress will come, you have to think about the unemployment as well as the simple wage deflation) is very small indeed, so the difference isn’t important here.