The Economies of New Europe Under Attack from Crisis

The Hungarian government is preparing for the possibility of its economy falling into recession next year, indicating that even former communist Europe is facing the consequences of the financial crisis.

Hungary, which, like Ukraine and Iceland, has turned to the International Monetary Fund (IMF) for assistance, announced that it will amend its originally projected budget for 2009, which was based on an expected growth of 1.2 percent, to take into account the possibility of recession. This is the first of the larger, export-driven economies of Central Europe to take such a step. "We should prepare for the fight of Europe and the world with recession and forecast a reduction of up to one percent in activity for the Hungarian economy, rather than its growth," said Hungarian Prime Minister Ferenc Gyurcsany.

Governments across the region have cut their growth forecasts and expect a decrease in budget revenues, which is a difficult situation at a time when their options for new borrowing on international debt markets are limited due to the global credit crisis. The region, once considered by economists to be sheltered from the impact of the crisis due to low exposure to toxic debts, has nevertheless been shaken this month as foreign investors began to divest from local assets and flee to developed markets. The wave of sales has sharply impacted currency, debt, and equity markets across the region.

Hungarian Prime Minister Gyurcsany stated that his government will reduce the budget deficit in 2009 to 2.6 percent of GDP, compared to the previously targeted 2.9 percent. Romania’s credit rating was downgraded by Standard & Poor’s (S&P) on Monday, assigning it a ‘junk’ status, which resulted in a 2.0 percent drop in the value of the leu. Deputy Governor of the central bank Cristian Popa deemed the agency’s move unjustified, stating that access to financing has not visibly worsened.

Although the IMF emphasized that it is not negotiating with Romania, it noted that the external environment for the country, or its ability to continue borrowing money to stimulate the economy, is very difficult. Latvia, whose credit ratings were also downgraded by S&P earlier in the week, announced further reductions in its budget deficit compared to the planned 1.85 percent of GDP. The agency also downgraded the ratings of neighboring Lithuania. Bulgaria, another vulnerable country due to high foreign debt, has cut its growth rate estimates to 4.7 percent, down from the previously forecasted 6.5 percent, and the World Bank has urged the country to prepare an emergency plan.  (H)