The Last Shall Be the The Last Shall Be the First: The East First: The East European European Financial Crisis, Financial Crisis, 2008-10 2008-10 Anders Åslund Anders Åslund Senior Fellow Senior Fellow Peterson Institute for Peterson Institute for International Economics, International Economics, Washington, DC Washington, DC
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The Last Shall Be the First: The East European Financial Crisis, 2008-10 Anders Åslund Senior Fellow Peterson Institute for International Economics, Washington,
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The Last Shall Be the First: The Last Shall Be the First: The East European The East European
Anders ÅslundAnders ÅslundSenior FellowSenior Fellow
Peterson Institute for International Peterson Institute for International Economics, Washington, DCEconomics, Washington, DC
QueriesQueriesCauses of crisis?Causes of crisis?To devalue or not?To devalue or not?Outcome?Outcome?Political economy?Political economy?Outlook?Outlook?
Causes of the CrisisCauses of the Crisis Loose Monetary policy of the US Fed and ECBLoose Monetary policy of the US Fed and ECB Excessive capital inflows (carry trade)Excessive capital inflows (carry trade) Excessive credit expansionExcessive credit expansion Real estate bubbleReal estate bubble Rising inflationRising inflation Current account deficitCurrent account deficit Currency mismatchesCurrency mismatches
But decent public finances and little leverageBut decent public finances and little leverage
Inflation in 2008Inflation in 2008(average consumer prices, percent change)(average consumer prices, percent change)
Current Account Deficit, 2007, 2009, Current Account Deficit, 2007, 2009, (Percent of GDP)(Percent of GDP)
Source: World Economic Outlook , IMF, (accessed on March 24, 2011)
*2010 figures based on IMF estimates
Foreign Debt, end 2009Foreign Debt, end 2009
(percent of GDP)(percent of GDP)
Currency Mismatches: Currency Mismatches: Share of Foreign Currency Loans, 2007Share of Foreign Currency Loans, 2007
(percent of total loans)(percent of total loans)
Big GDP Fall in Baltics in 2009Big GDP Fall in Baltics in 2009
(percent annual growth)(percent annual growth)
IssuesIssuesOverheating followed by “sudden Overheating followed by “sudden
stop” stop” Large falls in GDP: Latvia 25%Large falls in GDP: Latvia 25%Caused big budget deficitsCaused big budget deficitsLarge current account deficitsLarge current account deficits
Holding the PegHolding the PegBank system survived & govt Bank system survived & govt
did not have to recapitalize itdid not have to recapitalize itBankruptcies avoidedBankruptcies avoidedGreat integration renders Great integration renders
devaluation ineffectivedevaluation ineffective
Internal Devaluation: A crisis Internal Devaluation: A crisis is a terrible thing to wasteis a terrible thing to waste
Major fiscal adjustment 10% in Major fiscal adjustment 10% in 2009 in Baltic countries2009 in Baltic countries
Reduced public salaries & staffReduced public salaries & staffClosed state agenciesClosed state agenciesClosed schools & hospitalsClosed schools & hospitals
Lean & efficient public sectorLean & efficient public sector
Alternative: DevaluationAlternative: Devaluation
Advantage: Earlier recovery Advantage: Earlier recovery through exportsthrough exports
Disadvantages:Disadvantages: Bank system collapseBank system collapse Oligarchs/big exporters would have Oligarchs/big exporters would have
gained wealth and power gained wealth and power Less reformsLess reforms