Economic storm in Eastern Europe gets on global nerves

Special Report:Global Financial Crisis

European Commission President Jose Manuel Barroso (L) and Czech Prime Minister Mirek Topolanek, whose country currently holds the rotating Presidency, hold a news conference after an emergency European Union leaders summit in Brussels March 1, 2009. EU leaders meeting in Brussels on Sunday discussed possible action on the financial crisis amid concern eastern European countries may need more help. (Chinese media/Reuters File Photo)
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by Chinese media writer Ding Yi

BEIJING, March 10 (Chinese media) -- The worsening economic

situation in Eastern Europe has stirred up worries that it could spread to the

western part of the continent, or even pose new systematic threats to the rest

of the world, two Chinese scholars said here Monday.

But the European Union (EU) is expected to fix the

problems case by case, they said in an interview with Chinese media.

HEAVY DEPENDENCE ON

FOREIGN CAPITAL

"Heavy foreign debts and excessive credit growth are

the common problems the Eastern European countries faced in the crisis," said

Kong Tianping, director of Institute of Eastern European, Russian and Central

Asian Studies in the Chinese Academy of Social Sciences.

He noted that last year, almost all Eastern European

countries' foreign debts reportedly exceeded 50 percent of their GDP.

Western banks controlled some 70 to 90 percent of the

shares in banks in Eastern European countries, he added.

Credit accumulation in those countries is also too

fast these years. Citing statistics of Poland, the Czech Republic and Hungary,

he said that foreign currency loans of enterprises in these countries have seen

an average growth of 15 percent in recent years, and personal consumer credit

has increased by an average of 88 percent.

Besides, heavy dependence on exports is also taking

its toll on Eastern Europe's economy.

A sharp fall in external demand, especially that from

Western Europe has caused exports, once the major driving force for Eastern

Europe's economy, to shrink substantially.

The situation got even worse as Western European

banks and foreign investors began to withdraw money from the region in the wake

of the financial storm, bringing serious capital flight, Kong said.

The Institute of International Finance (IIF), a

leading global association of financial institutions consisting of over 380

members, has predicted a net outflow of about 61 billion U.S. dollars this year

from the emerging markets.

And Eastern Europe will see a contraction of 27

billion dollars in foreign investments, the IIF said.

GETTING ON GLOBAL

NERVES

As Western banks have invested heavily in Eastern

Europe, once the financial system in the East slumps into a crisis, there is no

way the Western banks will be able to escape unscathed.

Therefore, there is mounting concern that if the

Eastern European economies collapsed, it could trigger further instability

across the continent.

Credit rating agency Moody's Investors Service

recently has issued a warning that Western European banks are at risk of rating

downgrades due to loans to the eastern side.

European Central Bank governor Jean-Claude Trichet

said the Eurozone's financial system is under "severe strain" and risks setting

off a downward spiral as the banking crisis and economic recession feed on each

other.

Deeper economic downturns in Europe would have a

spilling effect on the rest of the world, and seriously hamper the global

efforts to revive the economy, analysts said.

AID PLUS

SELF-RESCUE

Zhu Xiaoguang, a researcher from Kong's institute

said that Western Europe has taken some actions to help the Eastern partners,

but on a case-by-case basis.

To stimulate activity and slow job losses, EU leaders

are pumping nearly 500 billion euros (about 632.2 billion dollars), or 3.3

percent of the bloc's GDP, into the economy, on top of the 300billion euros

(about 379.3 billion dollars) used to recapitalize banks to avoid a financial

meltdown and 2.5 trillion euros (about 3.2 trillion dollars) in guarantees to

encourage interbank lending.

Furthermore, the European Investment Bank, the

European Bank for Reconstruction and Development and the World Bank, pledged

recently to jointly invest 24.5 billion euros (about 31 billion dollars) on both

Central and Eastern Europe to combat the crisis.

Eastern European governments also approved a series

of economic stimulus plans designed to maintain financial stability, increase

the employment and improve economic status.

Meanwhile, the central banks of Romania, Hungary, the

Czech republic and Poland said that the depreciation of Eastern European

currencies had been exaggerated, adding their banks would be prepared to fix

exchange rate.

"We have to fix those problems case by case rather

than creating the impression that Eastern Europe is one black hole," Alexandr

Vondra, the Czech vice-premier for European affairs said in Prague last month.