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Eastern Europe: Could Asia's Financial Crisis Strike Europe?

Prague, 16 September 1997 (RFE/RL) -- Southeast Asia, for years considered the world's economic miracle, has been rocked in recent months by plummeting currencies, faltering stock markets and disrupted trade patterns.

Some of the region's leaders, accustomed to growth and rising prosperity, have raged against sinister foreigners whom they blame for the downslide. Malaysia's Prime Minister Mahathir Mohammad at one stage spoke of speculators deliberately trying to destroy his people's wellbeing. Indonesia's Justice Minister Utoyo Usman said currency speculators fostering economic chaos should be charged with treason -- a capital offense.

Signs of stabilisation have appeared in recent weeks, indicating that the worst is over for Southeast Asia. But the question arises whether the same phonomenon could happen elsewhere. Could the transition economies of Eastern Europe suffer the fate of the Asian Tigers? And are there sinister forces at work?

Financial experts say yes, it could happen in East Europe -- if the same financial conditions apply. And they say no, there's nothing sinister, just the normal workings of the market.

Julian Jessop, a London-based senior economist with the investment house Nikko Europe, told RFE/RL yesterday that any region which is dependent on big foreign capital inflows for its development -- and that applies to East Europe -- is vulnerable if many investors start to withdraw their money at the same time. In Asia, for example, vast investment sums had flowed from outside into local banks. When investors saw those countries' current account deficits growing, and exchange rates becoming uncompetitive, they moved to retrieve their money. The banks, meanwhile, had lent out or spent that borrowed money, and had liquidity problems when asked to pay it back. So events began to spiral. Jessop says its true currency speculators were also at work, but he says just like sharks in the ocean they only attack where they see weakness. A healthy, well-run economy won't attract prowling speculators.

Another East Europe analyst, Stuart Parkinson of Deutsche Morgan Grenfell, told RFE/RL that there is a set of clear warning signals. When strong growth fed by foreign investment combines with big current account deficits, with worsening fiscal positions, and with uncompetitive currency exchange rates, then trouble is on the horizon.

Applying that formula directly to Eastern Europe, Parkinson says the pattern now fits Slovakia. That country enjoys strong growth but suffers a current account deficit running this year at some $2 billion, and with banks indebted to foreign banks. It is therefore vulnerable if foreign lenders want their money back quickly.

Looking at the total picture in East Europe, Parkinson describes a wave motion. He says the wave has already broken over the Czech Republic, where the koruna currency suffered a humiliating loss of value last May and where direct foreign investment has dried up. Slovakia is now on the crest of the wave, threatening to topple. Further back on the rising profile of the wave sits Poland, which has good growth but is suffering a ballooning current account deficit expected to reach 4 to 5 percent of GDP this year. Parkinson says that after this weekend's general election in Poland, the new government must act immediately to clamp down on the budget deficit.

Behind Poland lies Hungary, where the economy is just starting to gain momentum again, and is not yet in any danger of overheating, and at the bottom of the wave come Romania and Bulgaria, which are still in the early stages of transformation. He says both those countries, particularly Bulgaria, are now looking attractive as foreign investment targets, provided they continue to work well on their restructuring process.

Returning to the question of currency speculators, Julian Jessop of Nikko emphasises that the way to deter them is to follow sound economic policies. Whipping up hysteria by talk of evil forces achieves nothing and simply worsens a crisis of confidence.

And he predicts that Eastern Europeans will gain more attention from the speculators in the years ahead. That's because most of the West European currencies will soon be submerged into the common European Union currency the Euro. Those who speculate today on the movements of the French franc, for instance, will be likely after monetary union to turn their attention instead to the Czech crown or the Polish zloty.

Jessop expresses hope therefore that Eastern European governments have learned a lesson from South East Asia, namely not to overreact to market movements and not to fight the market when there is no solid ground to stand on. He says that where investment money flows in looking for profit, its legitimate that the same money begins to flow out again when prospects for profit diminish. The solution is to follow policies which continue to provide the right conditions for investment.