“Many central and eastern European countries simply don’t have either the financial strength or the technical expertise to bail out banks,” said Lars Christensen, a senior emerging-markets analyst at Danske Bank A/S in Copenhagen. “It’s like an Iceland look-a-like contest and there are a number of candidates looking very fragile at the moment.”
As rumours abound about the imminent formal “bankruptcy” of the Hungarian economy – the BUX stock index fell as much as 11.9 percent yestoday, while the forint slumped 5.3 percent against the euro and liquidity in the foreign exchange market more or less evaporated – many commentators are asking the impertinent sounding question: “will Hungary be the next Iceland”. To that question I will answer with a categorical no. But not for the reason that most standard commentators offer, that, for example Hungarian private sector credit is at 62 percent of GDP, compared with 407 percent in Iceland, or that short-term external debt obligations are at 112 percent of reserves, compared with 1,705 percent in Iceland.
I do not doubt that Hungary’s short term position is much less leveraged than Iceland’s is, although I also don’t doubt that the Hungarian financial system will need IMF support to ease the financial distress caused by the unwinding of the foreign exchange denominated mortgage market and the fall in the forint against the Swiss Franc.
But this is not why I don’t think Hungary is like Iceland, or better put that Iceland is like Hungary, or like most of the EU10. My reasoning howvere is longer term. The longer term financial and economic future of Iceland is rosy, once they weather the present storm, and learn some belated lessons. I wish I could say the same about Hungary. Indeed I wish I could say the same about any of the 5 other candidates for IMF aid whose names have been mentioned on this blog this week – Latvia, Lithuania, Estonia, Ukraine and Serbia. I will offer three, simple but clear data points.
Iceland 34.8 Hungary 39.1 Latvia 39.9 Lithuania 39 Estonia 39.6 Ukraine 39.4 Serbia 37.5
Iceland 1.91 Hungary 1.34 Latvia 1.29 Lithuania 1.22 Estonia 1.42 Ukraine 1.25 Serbia 1.69
Population Growth Rate
Iceland (plus) 0.783% Hungary (minus) 0.254% Latvia 0.629% (minus) Lithuania% 0.284% (minus) Estonia 0.632% (minus) Ukraine 0.651% (minus) Serbia 0.4 %(minus)
That is to say, Iceland is a young country, almost reproducing itself in terms of children, and with a rapidly expanding population of working age. Hungary, Latvia, Lithuania, Estonia, Ukraine and Serbia on the other hand are comparatively old country, with a rapidly ageing populations, where each generation is about two thirds of the size of the previous one, and where the potential workforce and total population are now in long term decline.
This is why Iceland – even though it has gone to a huge excess – can sustain a much higher level of “leveraging” into the future than Hungary, Latvia, Lithuania, Estonia, Ukraine and Serbia can, and why in the longer term Iceland is certainly not comparable to these East European countries. I do not say any of this to criticise these countries, or their citizens, but really I am making this point out of a deep seated concern about the future of the countries that I do care about. The point here isn’t to “have ago”, but to illustrate why it was always obvious to me that what is currently happening on the economic front was always going to happen, and why it was that Eastern Europe was always going to be one of the most serious causualties of the global credit crunch once it finally got a grip on things. I am also writing this to give voice to my feeling of impotence and frustration in the face of the turn events are taking by saying, for god’s sake, why doesn’t someone do something, why doesn’t someone react?
The background to some of the arguments presented above can be found in the following posts:
Catch Up Growth and Demographics – Evidence from Eastern Europe by Claus Vistesen