Monday, November 03, 2008

Eastern European Countries Face Economic Downturn, Negotiate with IMF

Sources: Bloomberg, Ukraine Faces Devaluation as Politicians Haggle; Reuters, Serbia Discussing IMF Stand-By Deal; Novinite, IMF Denies Allegations of Negotiating Financial Assistance for Bulgaria; Reuters, IMF to Visit Romania, No Assistance Talks Planned; Bloomberg, EU Says Economic Outlook for Its Eastern Members is "Darkening"; Bloomberg, East European Businesses More Pessimistic Than Ever on Crisis; International Herald Tribune, IMF Tackles Crisis in E. Europe; Reuters, Crisis to Hit Baltics; Poland, Czechs Spared

Though the spotlight has been on Hungary since last week's deal with the IMF, World Bank, and EU, other countries in the region are also in different stages of loan negotiations. Ukraine passed legislation on Friday to accept the initial terms of the IMF loan agreement, but parliament still needs to approve conditions. The Prime Minster continues to block legislators from choosing a date for the Ukranian presidential election, initially planned for early December, and Ukraine faces capital flight and a falling currency that makes its dollar-denominated debt more and more expensive to repay. The political troubles will make it difficult to balance the budget, and the IMF has also asked Ukraine to let its currency float freely – currently there is an intervention band within which the Central Bank can defend the currency.

Meanwhile, the Serbian government is growing receptive to using IMF money, and Serbia is currently negotiating a stand-by agreement with the IMF. Though the agreement is a precautionary measure, Serbia may need funding in the future. The IMF has also been in negotiations with Belarus, and there is speculation that the Baltic states, Romania, and Bulgaria may also need to make IMF deals in the near future. The IMF and World Bank will be visiting Romania this month, but the trip was scheduled last year and there are no plans to negotiate a loan in the works. Bulgaria also denied that it is in talks with the IMF.

The European Commission expressed concern Monday about its Eastern European member states. It expects Poland, the Czech Republic, and Slovakia to escape the financial crisis relatively unscathed, but is less optimistic about the Baltic states and Hungary. Though growth is slowing throughout the region, the former countries are better poised to recover quickly. Eastern European businesses are also in trouble, because there is less demand from Western countries that normally import manufactured goods. Central Banks in the region may soon choose to cut interest rates to boost investments as Western Europe has already done.

1) How does the economic performance of Eastern European countries relate to the performance of Western Europe and the question of whether an individual country is a member of the EU or the eurozone?
2) Is the effect of the current crisis on Eastern Europe a sign that countries should tie their economies more closely to the West in the future to build collective strength, or try to become less dependent on Western economies to avoid a domino effect?

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