Posted by: Dirk | September 4, 2009

Why Eastern Europe ’09 is not Asia ’97

The IMF has moved into the blogosphere, and I have found an article I especially like. Ajai Chopra explains why Eastern Europe did not repeat the experience of the countries hit by the Asian crisis back in 1997. Here is the main part:

Yet unlike the experience in Asia, exchange rate depreciations at the start of the crisis in the CE3 countries soon slowed. Since March 2009, the forint, zloty, and koruna have actually been regaining value, with central banks even leaning against the wind to rein in appreciation and rebuild reserves (see chart below). The modest depreciations have meant that serious distress for foreign-currency indebted corporations and households has been avoided, thus mitigating the adverse impact on jobs and growth that was seen in Asia because of balance sheet adjustments.

Chopra continues to explain why depreciations were modest and also why the Baltics were not that lucky. Having dealt with the Baltics in a 2007 paper myself, I think Chopra’s work hits the nail on its head. The Baltics are heavily loaded with foreign debt, probably helped by the enthusiasm of Scandinavian banks to enter their markets.

The image that I will keep of the Baltic’s golden years is that reported by a colleague who went to … one of the three countries and reported he’d seen a woman in a fur coat, under which she wore a bikini. It was autumn and she moved through the downtown of the capital. Maybe it was Latvia?

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