Is Eastern Europe on the Brink Of An Asian Style Crisis?

* In terms of expected lost output and the sell-off in CEE markets, what's currently happening in the CEE looks like a market meltdown on the same scale as the Asian Crisis of 1997, according to Danske

CEE Today: Echoes of Asia circa 1997
* Danske: In those CEE countries least affected by the crisis (i.e. Poland, Czech Republic, Slovakia and Slovenia), GDP is like to drop at least 2-5%, while those countries worst affected (i.e. the Baltic States, Bulgaria, Romania and Ukraine) are likely to face double-digit declines in GDP. In other words, in terms of expected output lost in the region, this is as bad as or even worse than the Asian crisis of 1997-98
* See related spotlight issue: Fast Growth In Eastern Europe Has Come To An End
* External imbalances in CEE of today rival, and in some cases exceed, the build-up of imbalances in pre-crisis Asia - i.e. current account deficits in Southeast Asia from 1995-97 fell within the 3.0-8.5% of GDP range, while those in CEE were well over 10% of GDP in Romania, Bulgaria and the Baltics in 2008 (Stokes)
* The Asian crisis was, in many respects, a crisis of private debt rather than public debt, and so have been the crises hitting Hungary, Latvia and Ukraine
* Foreign-denominated loans helped fuel growth in eastern European economies including Poland, Romania and Ukraine, which compares with the Asia in the 1990s
* Krugman: "Key to the Asian crisis — and of Argentina’s collapse in 2002 — was the way domestic players leveraged themselves up with foreign-currency loans. When the capital inflows dried up, and the Asian currencies plunged, these debts suddenly became a much bigger burden, decimating balance sheets and causing a downward spiral of deleveraging
* There is no reason why the sell-off of CEE currencies should cease soon, unless there is substantial intervention from the EU and/or the ECB to support markets. Danske thinks it unlikely local authorities will be able to muster sufficient resources to curb the sell-off in CEE currencies in the present environment. See related spotlight issue: Eastern European Currencies: Under Pressure

Differences between Asia circa 97 and CEE of today
* Bank Austria sees four key difference between 'Asia of 1997' and Emerging Europe of today:
* 1) Fx reserves in relation to short-term debt are generally higher in EE than they were in Asia - that is, CEE policymakers have a greater ability to plug financing gaps than some Asian central banks did
* 2) FDI as % of GDP is higher in most EE countries now than in most Asian countries in 1996. Countries in EE have a lower reliance on more volatile portfolio financing
* 3) Quality of banking regulation and enforcement of the regulation is arguably far better in CEE now than in pre-crisis Asia
* 4) A significant number of CEE countries are EU members. Not only does this significantly strengthen institutional and regulatory environment (and reduce capital flight risk), it also increases the likelihood of external support if needed