Guest post: Roubini’s RGE Monitor: Threat of ‘Asia-Style Crisis’ in Eastern Europe

Submitted by Edward Harrison of the site Credit Writedowns.

I am not the only one who sees events in Latvia as a potential catalyst for further downside risk to the reflation trade.  Mary Stokes over at Nouriel Roubini’s site has a very readable post out on why we should be watching events in that tiny Baltic nation for potential signs of contagion elsewhere.  She notes:

The collapse of the Thai baht in July 1997 helped spark the Asian financial crisis. Could events in Latvia spawn a similar contagion? Eyes are focused on this small Baltic economy, amid growing talk of a devaluation, due to the potential for spillover effects into its fellow Baltics, Sweden and the broader Eastern European region.

Strong trade and financial linkages, not to mention similar macroeconomic vulnerabilities, mean a Latvian crisis would almost surely have knock-on effects on neighboring Estonia and Lithuania, as detailed in this RGE EconoMonitor post in early May. A Latvian crisis would also have negative spillover effects into Sweden via Swedish banks’ heavy exposure to the Baltic trio. The wildcard is how a Latvian crisis would affect the greater Central and Eastern European (CEE) region. Direct trade and financial linkages between Latvia and CEE economies, outside of the Baltics, are limited. Nevertheless, many of these countries – particularly Bulgaria and Romania – share similar macroeconomic vulnerabilities with Latvia, meaning a crisis there could ‘wake up’ investors to the potential for crises in the rest of the region.

Last July I was talking about the Baltics as the next Argentina, but it seems we are past that already now.  At present, the legitimate fear is ‘Latvia as the next Thailand.’  There’s a new meme for you.  While I am much more bullish about the reflation trade, I still harbour doubts, particularly when it comes to Eastern Europe. One of my ten predictions for 2009 was that Eastern Europe would infect the Eurozone and bring the European banking system to its knees (that was prediction #4 back in December).  I do think the situation is brighter.  Nevertheless, Eastern Europe is going to be a problem going forward and Latvia is merely the catalyst as Thailand was in Asia in 1997.

The broader CEE region has minimal trade and financial linkages with the Baltics. So the key channel of contagion between the Baltics and the broader CEE region would be via the ‘wake up channel’ – meaning a crisis in Latvia could serve as a wake-up call to investors, alerting them to similar vulnerabilities elsewhere. So far, the evidence suggests the rest of the CEE will not go unscathed if Latvia devalues, despite their limited linkages. For example, the recent sell-off in the Polish zloty and Hungarian forint was largely attributed to concerns over potential spillover effects from a Latvian crisis.

The full post is linked below.  But, I suggest you look over at FT Alphaville for more coverage on this situation.  They have run a number of good posts on both the Baltics and the CEE banking situations.  The guys over at A Fistful of Euros are on the case as well.

Back in May, Michael Robinson of the BBC released an amazing podcast that captures the situation in Latvia quite well – selling $3,000 flats for $200,000.  Nice!  In my view, this is probably the best on the ground look you will see by a journalist anywhere.  Listen to the podcast below.

DocArchive: On the brink – part 1



Is Eastern Europe on the Brink of an Asia-Style Crisis?  – RGE Monitor

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About Edward Harrison

I am a banking and finance specialist at the economic consultancy Global Macro Advisors. Previously, I worked at Deutsche Bank, Bain, the Corporate Executive Board and Yahoo. I have a BA in Economics from Dartmouth College and an MBA in Finance from Columbia University. As to ideology, I would call myself a libertarian realist - believer in the primacy of markets over a statist approach. However, I am no ideologue who believes that markets can solve all problems. Having lived in a lot of different places, I tend to take a global approach to economics and politics. I started my career as a diplomat in the foreign service and speak German, Dutch, Swedish, Spanish and French as well as English and can read a number of other European languages. I enjoy a good debate on these issues and I hope you enjoy my blogs. Please do sign up for the Email and RSS feeds on my blog pages. Cheers. Edward


  1. VG Chicago

    Nonsense! While I respect many of Roubini’s past predictions, he’s wrong about Eastern Europe. I am quite familiar with Romania, thus I make these points about that country, since I know it well:

    1. As of today, most investors from Western Europe have already left Romania, this with little impact on the nation.

    2. Romania’s economy is not dependent on credit. It is largely a cash-based economy.

    3. Romania has a sizeable trade deficit with the West (Romanians love BMWs and Mercedeses). Therefore, Romania’s import of Western products is likely to decrease, thus it will hurt the West a lot more than Romania. Romania’s car manufacturer (Dacia) is likely to benefit.

    4. Over 2 million Romanians have gone to work in Western Europe, mainly Spain and Italy. However, given the severity of the crisis in those nations, more and more Romanians are returning to Romania. And, when they do, they bring their sizeable saving with them as well. They are now investing in construction projects or purchasing goods in Romania. Therefore, this reverse migration is likely to help Romania and hurt the West.

    I am not concerned about Romania. The doomsayers would do well to redo their research. I am more concerned about the lazy, work-allergic French and Spaniards, or the alcoholic and sexually depraved nations like the United Kingdom, and Netherlands who have gotten used to have their work done for them by Eastern Europeans, while they discriminate and denigrate these easterners with every chance they have. I hereby foresee a complete collapse of Western Europe (a.k.a. “Old Europe”), and a return to the “Let them eat cake” era.

    Yours truly,
    Vinny GOLD

  2. Mara

    I am Latvian, living in the States. I still have lots of family over there. Some of them have already left to other european countries. It appears the situation would be similar to the soviet collapse of '91–another round of western induced economic "shock therapy". Any more "therapy" and the patient will be dead.

    Partial issues for the country were insufficient vital industries, exports and production in the post-soviet era. We had dairy and timber as the main industries. To keep up with our more urbane cousins to the west, we became a conduit for western-style banking, and (my opinion) a pipeline for russian oligarch and drug money heading into the eurozone, making for a bustling banking center. We also made money charging the Russians transit fees for gas pipelines. Slick finance and watching pipes does not exactly make for a truly productive culture, but crazy amounts of money were flowing in, driving real estate prices to truly insane levels, compared to avg local resident incomes. It was a bubble and a half.

    I want to interject on the violence portrayed in the media. The demonstrations were actually pretty peaceful until the cops got antsy at the end and started getting heavy with some drunk guys. Then the violence erupted. We're actually pretty mellow folks. But once you've lost your job, food prices increased and you're up for moving back into your parents' one bedroom flat, tensions can, understandably, escalate.

    The unfathomable part was the government's nodding acceptance to borrow from the IMF to pay for bad private loans given out by mostly swedish banks (for vastly overpriced real estate). Some of the loans were to locals, some other nationalities that wanted 2nd homes in Latvia. My understanding is that most of the mortgages were full recourse, but certainly not guaranteed by the govt. The real options for the govt would be to:
    1. Allow the banks to repossess and auction the properties regardless of local or external ownership
    2. Only allow repo on foreign owned properties
    3. Allow no repossessions and nationalize the properties.

    Now the avg Latvian is getting wages cut (if they aren't being fired outright) and many social and govt institutions are cutting back dramatically or closing entirely. Why? Because swedish banks needed to be bailed out of criminal loans with IMF money and the latvians will suffer for this for at least a decade.

    Of course, if I were in charge of "financial diplomacy" I would also include doing radical things like joining the SCO, getting off the euro and onto gold or renminbi, but only after I froze assets of the swedish banks and told them to go f*ck themselves for being so stupid in the first place. I would also outlaw mortgages being denominated in foreign currencies and/or payments tied to forex fluctuations, since agreeing to such terms is similar to prostitution, except it costs you, lasts for 15-30 years and does not come with lubricant.

  3. VG Chicago


    I feel your pain, my friend, I feel your pain.

    But since when has Latvia been on the Euro? Or, are you referring to getting out of the EU? And if so, then what? Rejoin the Russian Federation? Latvia’s only hope remains the EU, NATO, and the West — very much Romania’s situation.

    Anyway, from what you’ve described, it sounds like slick financial engineering hasn’t worked out very well for Latvia.

    I also don’t understand why would real estate prices skyrocket in a Nordic nation. No offense meant, but weather in Latvia kind of sucks, and those second-home owners would have been wiser to get a condo in Spain of Greece instead. Sorry, but unless you’re a polar bear, 6 months of winter just isn’t that appealing.

    As far as Latvians migrating to Western European nations is concerned, don’t you think it’s a bit late for that? Time for that was 20 years ago. The Romanians, the Polacks, the Bulgarians, and others have started doing that 20 years ago. Now these people have transferred tons of cash to their homelands, and can weather the recession while drinking domestic beer and eating homemade sausages by the pool. Sorry, but there are no jobs in Western Europe for newly arriving easterners anymore.

    BTW, I was born in Romania, but spent most of my adult life in the greatest nation on Earth. Can our French or British readers guess which might that be? Anyone? Anyone? Buler? Buler? There! We have a correct guess: the United States of America. And the winner is… a disgruntled Frenchman…LOL

    Vinny GOLD

  4. 123vorbei

    I am always amazed by this blind comparison between SEA in 1997 and Eastern Europe in 2009. GNP of Thailand was 160 billion USD in 1997. Latvia has a GNP of only 36 billion USD in 2008. Even if the other Baltic states are included, which are arguably in a better shape than Latvia, and you throw in a couple of other Eastern European countries (Ukraine, Bulgaria, Romania, Hungary) the size of economies in SEA was far more extensive in 1997. Stokes assertion that external debts of EE is larger than that of SEA in 1997 is wrong. Stokes cites only the example of Korea but forgets to mention that Thailand's debt was close to 100 percent. In addition this time the IMF reacted faster with providing funds than in 1997. The overall financial support for SEA was about 250 billion USD and this far exceeds the help for EE (about 80 billion so far).


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