Eastern European Countries Look for Solutions as Currencies Fall

Sources: Reuters, Czechs Cut, Hungary Unveils Bank Plan as Crisis Bites; Reuters, Hungary Gov't, Banks to Ease Risks of FX Borrowers

The Czech central bank on cut interest rates to 2.75% on Thursday, following the European trend of cutting rates to increase spending. This is the largest cut for the Czech Republic in six years, justified by a sharp drop in inflation and a development slowdown. The result was a 2.05% drop of the Czech currency on Thursday relative to the Euro.

Central and European nations that depend on the eurozone for exports are facing economic slowdown across the board. Poland, for example, expects growth to slow from a forecast 5.5% over 2008 to 3.5%. The polish zloty fell 2.4% on Thursday, and Poland has indicated that a rate cut may come sooner than expected.

Hungary and Serbia, on the other hand, have both had to raise rates to avoid capital flight. Serbia's currency fell 2% on Thursday, bringing it to a 29-month low, and it hopes that the pending IMF standby deal will come through and give confidence in the economy a boost. Hungary is planning to spend almost $3 million of its rescue package on supporting banks and cutting the budget deficit. It faces especially dire possibilities as a result of the European slowdown, being one of the countries most exposed to the eurozone.

Hungary announced Thursday that the money would go to nine banks particularly exposed by foreign currency borrowing. The deal will allow borrowers to ask for an extension on their loans without a fee if monthly payments increase significantly. It will also allow borrowers to change the denomination of their loans from foreign to local currency without a fee until the end of this year. Finally, borrowers who are having trouble repaying will be able to request temporary relief.

Questions:

1) Should Eastern Europe look in the future for more export markets to decrease its exposure to Europe (or any one region), or do you think poor performance was inevitable in this world financial climate?

2) How important is IMF reform or additional funding for the success of countries in the region as more and more countries begin to seek outside support?