Financial Iron Curtain May Shroud Eastern Europe

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In the global economic downturn, fast-growing economies in Eastern Europe have become financial flashpoints. Edward Lucas is Central Europe Correspondent for The Economist magazine. He tells Linda Wertheimer that the countries in the most financial trouble are Hungary, Ukraine and Latvia.

LINDA WERTHEIMER, host:

In the financial crises of 1997 and '98, emerging markets in Asia were big trouble spots. Now fast growing economies in Eastern Europe have become financial flashpoints. Romania is talking with the International Monetary Fund about emergency aid. The international aid group has already tried to help out central banks in Hungary and Latvia. To find out what's going on in that region, we spoke to Edward Lucas. He's Central Europe correspondent for The Economist magazine.

Thank you very much for joining us.

Mr. EDWARD LUCAS (The Economist): Hi, good morning.

WERTHEIMER: Just to be clear now, it's not every country in Central and Eastern Europe that's in financial trouble, but who's worse off?

Mr. LUCAS: We have seen three countries in real trouble, and that's Ukraine, which is big, corrupt, chaotically run; Hungary, which is being side-swiped by its enormous debts; and thirdly, Latvia, which was growing very fast, 10 percent a year, and then had a huge property crash and a bank went bust. And those three countries have all had to go to the IMF, and as you just mentioned, Romania's going there too. But other countries such as Poland, the biggest country in the region, is still in pretty good shape.

WERTHEIMER: Obviously there are countries - some countries which are very similar in culture and resources and whatnot that are doing very differently. I'm thinking of Hungary and the Czech Republic.

Mr. LUCAS: Well, that's a very good comparison, actually, because what the Czechs have is a really solid banking system. They have more deposits than they have loans and the Czechs have tended to borrow in the local currency, the koruna, rather than in foreign currencies. And Hungary, by contrast, you've got people who've been borrowing in Swiss francs and in euros, although they've been earning in the local currency, forints. And of course when the forint depreciates, then the size of the loan goes rocketing up and so do the repayments. So they're in real trouble.

WERTHEIMER: So is that where countries went wrong, going into debt in the wrong currency?

Mr. LUCAS: I think debt is a big part of it. What you've really got in all the ex-communist countries is a great first capital. They entered the post-communist era basically broke and they've had to borrow either from foreign banks or the bond market or get money from foreign investors one way or the other. And that was fine so long as the political and economic backdrop was basically sunny.

But now they're in the position that they're dependent on foreign money and some of them are in much better shape than others. So the Czech Republic -probably going to be okay; Hungary - heavily dependent on those loans being rolled over and dependent on Hungarian borrowers being able to pay back loans that they've borrowed in foreign currency.

WERTHEIMER: What does it look like in Eastern Europe? Rising unemployment, boarded up shop windows, something worse?

Mr. LUCAS: At worst it's people queuing outside banks unable to get their money back and it's migrant workers coming back from other countries they've been working and there's no work there and they come home and there's no work there. And the great danger is that it's not just a financial crisis, but it turns into a social and political one as well, because all these countries have basically got quite weak political systems.

They only became democracies 20 years ago, and now those political systems are coming under incredible strain. Back in the past you could blame communism. Now who do you blame? Maybe they're going to blame the West. That's going to be pretty troublesome. Maybe they're going to blame the whole political class and vote in some new guys who might be very populist or have some other wild ideas that we'd find very uncomfortable.

WERTHEIMER: Is that the cause of the talk, that these financial problems could cause a rift between Eastern and Western Europe? Hungary's prime minister said something about the New Iron Curtain. How serious is this?

Mr. LUCAS: Well, it is quite serious. It's the euro, the European Central Bank that runs the common currency, which is the best bastion against these huge financial storms that are rocking the world. And so what the East Europeans want is to get into that common currency umbrella, where their currencies can't be speculated against, because if you're a country like Hungary with the forint or Poland with the zloty, certainly Latvia with its lat, or Lithuania with its litas, these are tiny currencies by world standards. They get buffeted by these great financial storms, so they want to get into the euro. And the problem is the euro is basically a West European club, and the West Europeans don't think that the East Europeans are ready for it. And they're going to keep them out as long as possible, and that's the problem.

WERTHEIMER: Edward Lucas, thank you very much.

Mr. LUCAS: Thanks very much for having me.

WERTHEIMER: Edward Lucas is Central European correspondent for the Economist magazine. His new book is called "The New Cold War."

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