Crisis fears misplaced

WASHINGTON – Galloping credit growth and large current account deficits in Central Europe are worrying trends but fears of a sharp shock or a looming Asian-style crisis are misplaced, a senior World Bank official told Reuters. But a recent crisis in Latvia, which suffered a devaluation scare and a speculative attack on the currency, illustrates the dangers facing some of the countries in the region, said Shigeo Katsu, the bank’s vice president for Europe and Central Asia. «Apart from the Baltics, Bulgaria and Romania are possibly the most vulnerable ones that we would certainly keep a very close eye on,» Katsu said late on Friday in an interview. «Levels of credit expansion are much lower than the Baltics although there are some nervous people out there. We are not in a realm where the current account deficits are as bad as in Latvia but the situation does bear careful watching,» he added. Bulgaria has a current account deficit of about 16 percent of gross domestic product while Romania, which joined the European Union at the start of 2007 along with Bulgaria, has a deficit of over 10 percent. But these compare favourably with Latvia’s 21 percent of GDP – the highest level in the EU. To a lesser degree, these countries’ problems are replicated across most Central European states, though some like Hungary have taken steps to address their current account deficits. Many analysts say the region could be headed either for a violent sell-off, the kind that rocked Asia 10 years ago, or a slowdown that Portugal suffered around the time of euro accession in 1999. Katsu said these fears were overdone, though he acknowledged recent political developments in the countries highlighted a reform slowdown. Many countries have elected left-leaning parties into power or fractious coalitions that include radical nationalist groups keen on boosting spending on welfare. «In many ways, compared with the Asian crisis, overall in Central Europe, financial systems are in much better shape. Also the capital flows are of a much less speculative nature so I do not expect something of that magnitude,» Katsu said. He noted that Central European countries had been growing at an average annual rate of 5.5 percent, much below Asian countries before the crisis though there are exceptions such as Latvia and Slovakia which are seeing growth around 10 percent. «Unfortunately some countries seem to be overheating so one has to be very careful in keeping a close eye on them.» «In many of the new EU members, the concern is almost less of an economic one. You are seeing an imbalance between the political situation and the economic situation and it’s much more on the political side that we have to see a catch-up now,» Katsu said. In the short run that may continue to contribute a little to volatility. Except for Slovakia, which may join the euro in 2009, euro accession targets have receded well into the next decade.

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