WHICH country will be the next Iceland? The dramatic collapse of the Nordic country’s economy has concentrated international attention on other risky but obscure corners of the financial system. The stability of the Ukrainian hryvnia, the ill-regulated Kazakh banking system, and Hungarian borrowers’ penchant for loans in Swiss francs are subjects crowding on to policymakers’ desks.
Ukraine said on Friday October 17th that the IMF was about to lend it $14 billion. The fund did not immediately confirm that. Certainly the money and external reassurance would be welcome: Prominvest, the country’s sixth-largest bank, suffered a run amid speculation that it was in trouble and likely to be taken over. Earlier, the national currency, the hryvnia, hit an all time low against the dollar. The stockmarket has fallen by nearly 80 percent this year. Ukraine’s inflation is an alarming 25 percent.
Such numbers are not unusual for east European economies (Latvia’s current-account deficit is 15 percent, having been well over 20 percent last year). But they highlight the problems that emerging markets face during periods of financial turmoil. They are vulnerable first because they tend to have imbalances: they rely on high levels of foreign investment, which means that they have run up big current-account deficits, for example. Secondly because they are not rich enough to finance their own bail-outs.
The IMF is one place to turn. Its rules allow it to lend up to five times a country’s quota: the amount deposited when a member state joins. But the rules can be relaxed in a crisis. Another source is the European Central Bank. It has just lent €5 billion ($6.7 billion) to Hungary, which is not a member of the euro zone, but has an economy closely linked to it. Hungarians seeking to buy forints had been battling with a foreign-exchange market that had almost wholly seized up. The IMF is waiting in the wings, prepared to provide a much bigger loan if necessary, and to deliver an important public imprimatur of the government’s economic policies.
Although much richer than Ukraine, with GDP per person almost four times as high, Hungary is in some senses even more vulnerable than Ukraine, because of its large foreign debts. Public borrowings amount to 60 percent of GDP. That is partly the legacy of a wild borrowing spree by communist rulers in the 1970s and 1980s, and also of spendthrift governments since then. In 2006 the budget deficit was over 9 percent of national income; the current-account deficit was 6 percent. A further worry is that millions of Hungarian households and firms have taken out hard-currency loans, placing personal bets (perhaps rather ill-understood) on the likelihood that the forint-euro exchange rate would stay stable.
One big question is how many such crises will flare up, and how willing outsiders will be to deal with them. In most of the small, new, member states of the European Union, foreigners own the banking systems. If their loan books go bad, the shareholders will have to stump up. What if one of those home banks is in already in trouble? Nobody knows. Perhaps it will sell a troubled subsidiary elsewhere, maybe to Russia. Even if that prospect is unlikely, it sets nerves jangling in places such as the Baltic states.
Before the crisis, Hungary showed some signs of stabilising, thanks to a tough but unpopular austerity programme. The events of the past weeks have put that in doubt. That highlights the real problem for the ex-communist countries of Europe: weak politics. Their leaders found it hard enough to govern efficiently even when times were good. If foreign investors get stingier, and if growth slows or stops all together, effective government will be all the harder.