Financial Crisis in Eastern Europe (eBook)

Jens Jungmann is Managing Partner of a leading audit and advisory company responsible for the international business in the CEE states as well as the CIS. Dr. Bernd Sagemann is Director Accounting & Controlling at an international operating company in Germany. Alongside his daily business activities he is also an honorary professor and lectures primarily on Finance and Tax Law.

Foreword 6
Preface 8
Overview 9
List of Abbreviations 11
The World Financial Crisis 19
The Great Subprime Credit Crisisand its Impact on Eastern Europe 20
1. Introduction 21
2. The Great Subprime CreditCrisis and its Global Impact 22
2.1. The Causes of the Subprime Credit Crisis 23
2.1.1. Politicians Assisted in Creating the Subprime Monster 24
2.1.2. Central Banks Fuelled the Crisis 27
2.1.3. The Necessary Toolset 30
2.1.4. The Case of AIG 38
2.1.5. The Monolines 40
2.1.6. The Low Interest Rate Environment and the Demandfor Higher Yield 42
2.1.7. The Need to Deleverage 44
2.1.8. The Fiction of the Strong US Borrower and PredatoryLending Practices 45
2.1.9. The Rating Agencies Were Driving through theRear-view Mirror 46
2.1.10. The Markowitz Hypothesis 50
2.1.11. Moral Hazard in the Financial System 51
2.2. How the Subprime Crisis Developed to aGlobal Credit Crunch 54
2.2.1. The Magnitude of the Credit Crisis 54
2.2.2. How the Crisis in Subprime Debt Infected Other Markets 55
2.2.3. Hedge Funds and other Near-Banks 56
3. The Impact of the Subprime CreditCrisis in Eastern Europe 58
3.1. The Rise and Fall of the Countries inthe Region 58
3.2. The Role of the Government to Fight Backthe Crisis 60
Specific Areas of Crisisin Eastern Europe 62
Bulgaria:The Deferred Crisis 63
1. Situation before the Crisis 64
1.1. Retrospective Overview 64
1.1.1. The Decade of Downfall post 1989 64
1.1.2. The Boom Decade 65
1.2. Financial Status of the Private Sector 67
1.3. Financial Status of the Public Sector 71
1.4. Development Status of the Real Economy 73
1.4.1. Development Status of the Bank Sector 73
1.4.2. Development Status of Other Sectors 75
2. The Impact of the World Financial Crisis(2008/2009/2010) 76
2.1. Outline of the Expansion of the Crisis inBulgaria 77
2.2. Domestic Impact 79
2.2.1. Private Sector Recession 79
2.2.2. Governmental Involvement 84
2.3. Foreign Impact 85
3. Challenges and Coping with theFinancial Crisis 90
3.1. Fiscal Measures 90
3.2. Macroeconomic Stimulation Measures 98
4. Outlook for the Coming Years 100
4.1. Pro-cyclical and Anti-cyclical Effects 100
4.2. Fiscal Prospects 101
4.3. Prospects for the Real Economy 102
Czech Republic:Crisis Postponed – Navigation toRecovery 106
1. Situation before the Crisis 107
1.1. Methodology 109
1.2. Economic Development 109
1.2.1. The Lean Years of Economic Transformation 109
1.2.2. The Fat Years Before the Crisis 111
1.2.3. Bountiful Years Just Before the Crisis 119
2. The Impact of the World Financial Crisis(2008/2009/2010) 125
2.1. Economic Development in 2008, 2009 and2010 125
2.1.1. So Far So Good – Year 2008 and the Onset of Global Crisis 125
2.1.2. 2009 – The First Year of Crisis 129
2.1.3. Development in the First Quarter of 2010 135
2.2. Banking and Financial Crisis in the CzechRepublic 137
2.2.1. Development of Czech Banking System 137
2.2.2. Interest Rate Development 141
2.2.3. Credit Availability 143
2.2.4. Czech Currency Development 144
2.2.5. Maastricht Criteria 145
2.2.6. Stock Market Developments 147
2.3. Mortgage Lending Crisis in the Crisis 148
2.3.1. Mortgage Loans in the Czech Republic 149
2.3.2. Mortgage Market Evolution from 1995 to 2007 149
2.3.3. Impact of the Crisis on the Mortgage Market and LatestDevelopments 150
3. Challenges and Coping the FinancialCrisis 153
3.1. Anti-crisis Measures in the Czech Republic 153
3.2. Political Landscape of the CR during theEconomic Crisis 154
3.3. Summary and Comments on SelectedAnti-crisis Measures 156
3.4. Anti-Crisis Measures in Government EconomicPolicy 158
3.4.1. Anti-Crisis Measures Adopted by Previous Government 158
3.4.2. Existing Anti-Crisis Measures 160
3.5. Pension Reform and the Crisis 167
3.6. Other Crisis Exit Options – Nerv 168
3.7. Conclusions, Challenges and the Lessonsdrawn from the Economic Crisis 169
4. Outlook for the Coming Years 170
Hungary:A Country Hit Hard 173
1. Situation before the Crisis 174
1.1. Recent Historical Developments andtheir Effects on the Economy 174
1.2. Political Situation – A Prime Minister “UnderPressure” 180
1.3. Economic Situation 181
1.3.1. State Budget Deficit 181
1.3.2. Inflation 184
1.3.3. GDP growth 185
1.3.4. Foreign Direct Investment (FDI) 186
1.3.5. Unemployment Rate 187
1.3.6. Exchange Rate Development vis-à-vis the Euro 189
1.3.7. Social Situation – Demonstrations Against the Government 190
1.3.8. First Signs of a Crisis 191
2. The Impact of the World Financial Crisis(2008/2009/2010) 191
2.1. The Year 2008 191
2.1.1. Political Situation – Missing Awareness of the Crisis’ Depth 191
2.1.2. Economic Situation – High Deficit and the Hungarian Forint“Under Attack” 192
2.1.3. Social Situation 202
2.2. The Year 2009 203
2.2.1. Political Situation – New PM with Dwindling Support forStrict Austerity Measures 203
2.2.2. Economical Situation 205
2.2.3. Social Situation – People Angry about Corruption Scandals 220
2.3. The Year 2010 – Current Situation 224
2.3.1. Political Situation – New Confidence among Politicians /No Comparison to Greece 224
2.3.2. Economical Situation – First Signs of a Slight Recovery? 226
2.3.3. Social Situation – Positive Aspects out of the Crisis? 235
3. Challenges and Coping with theFinancial Crisis 237
3.1. Economic Policy Objectives 237
3.2. Characteristics of the IMF/EU rescuepackage 2008 238
3.3. Major Endeavours and Measures in2008/2009/2010 to Fight the NegativeImpacts of the Crisis 241
3.3.1. Employment Policy 241
3.3.2. Major State Aids and Private Investment Projectsin Hungary 243
3.3.3. Measures in 2010 Budget According to the Updated ConvergenceProgramme of Hungary for 2009-2012 244
4. Outlook for the Coming Years 245
Lithuania:The Return of Opportunities 253
1. Situation before the Crisis 254
1.1. Lithuania’s Journey into the Global Economyfrom 1991 to 1999 254
1.2. The Preparations for Entry to the EU –From 2000 to 2004 255
1.3. Development of Selected Economic Sectorsfrom 2004 Onwards 257
1.3.1. The Property Sector and Construction Industry 257
1.3.2. Foreign Trade 258
1.3.3. Banking Industry and Bank Lending 259
1.3.4. Industry 260
1.4. Economic Overview 261
1.4.1. GDP and the Rate of Inflation 261
1.4.2. Public Finances 262
1.5. Fiscal Situation 263
1.5.1. Corporation Tax 263
1.5.2. Income Tax 263
1.5.3. Value Added Tax 264
1.5.4. Other taxes 264
1.6. Labour and Social Policy in the Boom Years 264
1.6.1. Wage Costs 264
1.6.2. Unemployment Figures 265
1.6.3. Social Security 266
2. The Impact of the World Financial Crisis(2008/2009/2010) 268
2.1. Selected Economic Sectors 268
2.1.1. The Property Sector and Construction Industry 268
2.1.2. Foreign Trade 269
2.1.3. Banking Industry and Bank Lending 270
2.1.4. Industry and the Domestic Market 270
2.2. Economic Overview 271
2.2.1. GDP and the Rate of Inflation 271
2.2.2. Public Finances 272
2.3. Employment and Social Affairs 273
2.3.1. Wage Costs 273
2.3.2. Job Market 274
2.3.3. Child and Youth Poverty 274
3. Challenges and Coping with theFinancial Crisis 275
3.1. Challenges of the Financial Crisis 275
3.1.1. Pegged Exchange Rates 275
3.1.2. Inflation 276
3.1.3. Job Market 276
3.1.4. Migration 278
3.1.5. Banking System 280
3.1.6. Insolvencies 281
3.1.7. Downrating from Credit Rating Agencies 282
3.2. Challenges of the Financial Crisis 283
3.2.1. Job Market 283
3.2.2. Taxation 283
3.2.3. Social Security Insurance 286
3.2.4. Law 290
3.2.5. Further Measures 293
4. Outlook for the Coming Years 303
4.1. Accession to the Monetary Union 303
4.2. Current Economic Data and Forecasts 303
4.3. Developments and the Outlook for IndividualIndustries 306
4.4. Conclusion 308
Poland:(Po)Land of Opportunity 311
1. Situation before the Crisis 312
1.1. Poland – Location, Political System 312
1.2. Economic Situation of Poland before theFinancial Crisis 313
1.2.1. Construction 315
1.2.2. Trade 318
1.2.3. Industry 322
1.3. Financial Situation in Poland 325
1.4. Labour Market 325
2. The Impact of the World Financial Crisis(2008/2009/2010) 328
2.1. Macroeconomic Consequences of theEconomic Crisis in Poland 328
2.1.1. Construction 330
2.1.2. Trade 334
2.1.3. Industry 340
2.2. Economic Crisis and the Financial Situation inPoland in the Years 2008-2010 344
2.3. Labour Market 345
3. Challenges and Coping with theFinancial Crisis 347
3.1. Rescue Package for the EU Economy 348
3.2. Actions of the Polish Government toCounteract the Consequences of theEconomic Crisis 349
3.2.1. Government’s Anti-Crisis Plan 349
3.2.2. Anti-Crisis Package 352
3.2.3. State Aid in Repayment of Housing Loans 359
3.3. Counteracting the Crisis in Poland 361
3.3.1. Actions of the National Bank of Poland and the MonetaryPolicy Council 361
3.3.2. Actions of the Financial Supervision Authority 363
4. Outlook for the Coming Years 365
4.1. ‘Polska 2030 – Wyzwania rozwojowe’ Report 365
4.2. Euro 2012 – European Football Championship 367
4.3. Investment Attractiveness of Poland 368
4.4. Polish Presidency of the Council of theEuropean Union – 2011 370
4.5. Europe 2020: New Economic Strategy forEurope as an Opportunity for Poland? 371
Romania:Politics do matter 372
1. Situation before the Crisis1 373
1.1. Country Profile 373
1.2. The Lost Decade 1990-2000 375
1.3. Economic Growth and Social Change 376
1.3.1. The Turn-Around 2000-2004 376
1.3.2. Accession boost and growing imbalances 2005-2008 378
2. The Impact of the World Financial Crisis(2008/2009/2010) 382
2.1. Crisis – Sudden and Fierce 382
2.2. Structural Problems Revealed 384
3. Challenges and Coping with theFinancial Crisis 386
3.1. Late Recognition and Shiftless Reactions 386
3.2. Politics under Supervision: Romaniaand the IMF 388
4. Outlook for the Coming Years 392
4.1. Short Term: Recovery – Visible but Fragile 392
4.2. Long Term Perspectives 403
Russian Federation:The Rocky Road 408
1. Situation before the Crisis 409
1.1. Russia’s Economy Rising 410
1.1.1. Transformation to Capitalism – Breaking down the SovietSystem 412
1.1.2. Structure Changes and Free Capacity 413
1.1.3. Energy Sector 414
1.1.4. Putin’s Reforms 415
1.2. Overdependence on Oil and Gas 417
1.3. Financial Situation 419
1.3.1. The Banking System Vulnerabilities are Rising 421
1.4. Did the Growth Decade of 1999-2008 Benefitthe Average Russian? 421
1.4.1. Domestic Credit 423
2. The Impact of the World Financial Crisis(2008/2009/2010) 424
2.1. General Impact 424
2.2. Russian Specifics 425
2.3. Impact of Crisis Policies 431
3. Challenges and Coping the FinancialCrisis in Russia 435
3.1. Monetary and Exchange Rate Policies 436
3.2. Fiscal Policies to Preserve Social Peace, notInfrastructure 441
3.3. Structural Weaknesses, uneven GeographicalImpact 448
4. Outlook for the Coming Years 454
4.1. Investment in Oil 456
4.2. GDP 458
4.3. Fiscal Debt 460
4.4. Labour Markets 461
4.5. Population and Immigration 462
Serbia:Serial Tensions amidst Recovery 465
1. Situation before the Crisis 466
1.1. Political and Historical Turmoil 466
1.2. Recovering Years before the Crisis 467
1.2.1. Economic Situation 467
1.2.2. Financial Situation 475
1.3. Having Broken the Back on the Growth Path? 479
2. The Impact of the World Financial Crisis(2008/2009/2010) 481
2.1. Contamination of Serbia 481
2.2. Economic Crisis 481
2.2.1. Macroeconomic Developments 481
2.2.2. Balance of Payments and Trade 482
2.2.3. Foreign Direct Investment 483
2.2.4. Labour Market Flows 484
2.3. Financial Crisis 486
2.3.1. Attempt to the Financial Sector 486
2.3.2. The Serbian Dinar – Implications for a Currency Crisis 490
2.3.3. Financial Positioning 492
3. Challenges and Coping with theFinancial Crisis 493
3.1. Serbia on the Tightrope Walk 493
3.2. Financial Aid from the IMF 494
3.3. Contribution from the European Economy 495
3.3.1. European Union 495
3.3.2. European Investment Bank 496
3.3.3. European Bank for Reconstruction and Development 497
3.4. Anti-crisis Measures by the Government andthe Policy Response to the Crisis 497
3.4.1. Financial Sector Policy 498
3.4.2. Governmental package of measures 500
3.5. Further Assistance by the World Bank 506
4. Outlook for the Coming Years 507
4.1. Potential for Serbia as an EU Member State 507
4.2. Navigating Challenges Ahead – Outlook 2015 508
Slovakia:Small Land of Big Changes 511
1. Situation before the Crisis 512
1.1. Political and Economic Background of theSlovak Republic before the Global Crisis 512
1.2. Democratic Forces Gain Political Power afterParliamentary Elections in 1998 – PositiveTurnaround in among others Economic Policy 517
1.3. Period 2002-2007:Slovakia – Economic Tiger in CEE Area 519
1.4. Euro Adoption in Slovak Republic 524
2. The Impact of the World Financial Crisis(2008/2009/2010) 528
2.1. End of 2008 – First Signs of Crisis in Slovakia –only a Slow-down of Growth? 528
2.2. Beginning of 2009 – the Negative Impact ofthe Crisis Exceeds even the Most PessimisticScenarios 529
2.3. Banking Sector 532
2.3.1. Banking Sector before the Onset of Crisis 532
2.3.2. Banking Sector at the Time of the World Crisis 535
2.4. Labour Market 539
2.4.1. Development of the Enemployment Rate During Crisis 539
2.4.2. Development of Average Wage During Crisis 541
2.5. Development on the Real Estate Marketand in the Area of Mortgage Loans(Mortgage Banking) 542
2.5.1. Real Estate and its Development 542
2.5.2. Mortgage Financing in Slovakia – Fast Growth before theCrisis and Swift Reactions to the Immediate Situation atthe Time of Economic Crisis 546
3. Challenges and Coping with theFinancial Crisis 550
3.1. Measures Concerning Finances and Economy 551
3.1.1. Stabilization Aid for Banks 557
3.1.2. The Program of Providing Help to Citizens who areDefaulting on Housing Loans 557
3.2. Measures Concerning Business 558
3.3. Measures Concerning Employment 558
3.3.1. New contributions in order to preserve existing jobs andcreate new employment 558
3.3.2. Contribution for the Graduate Practice 559
3.3.3. Contribution for Self-Employment 560
3.3.4. Public finances 561
3.3.5. Business Environment 562
3.3.6. Investments and..Regional Development 563
3.4. Regional Differences and their Elimination –Even a Bigger Challenge after the Impact ofthe Global Crisis 563
3.4.1. Regional Differences in Unemployment and..AverageWages during the Crisis 564
3.4.2. Real Estate 566
4. Outlook for the Coming Years 568
Ukraine:Impact and Recovery from the Crisis 575
1. Situation before the Crisis 576
1.1. Economic Environment in Ukraine 576
1.2. Political Instability and Tax Burden 578
1.3. Conclusions 579
2. The Impact of the World Financial Crisis(2008/2009/2010) 580
2.1. Consequences of the Financial Crisis on theUkrainian Economy 580
2.2. Banking Sector Developments in the Ukraineduring the Economic Crisis 583
2.3. The Deep Fall of the Ukrainian ConstructionIndustry 586
2.4. Measures to Overcome the Economic Crisis 588
3. Challenges and Coping with theFinancial Crisis 592
3.1. Anti-Crisis Measures in Banking and FinanceSectors 593
3.1.1. Prevention of pre-term Deposits Repayment 593
3.1.2. Lending Activity 594
3.1.3. Refinancing of Banks 595
3.1.4. Recapitalization of Banks 596
3.1.5. Currency Regulation 597
3.2. Anti-Crisis Measures in Housing ConstructionSector 599
3.3. Crisis Related Alteration to Foreign InvestmentRegime 599
3.4. Anti-Crisis measures in Labour Market 600
3.5. Anti-Crisis alteration of Tax and CustomsLegislation 601
4. Outlook for the Coming Years 602
4.1. Defining Potential 602
4.2. Renewable Energy Opening Up New Fields forInvestments? 603
4.3. Boosting of Investments and Integrating withthe European Community due to HostingUEFA EUR 2012? 605
4.4. Obtaining the IMF Loan to Deal with LocalReforms and External Market Risks? 607
4.5. Increasing other Institutional and CommercialBorrowing? 607
4.6. Export of Steel and Grain Still Key Factors ofBoosting Ukraine’s Economy? 608
4.7. Force of Mergers and Acquisitions,Cooperation and Privatization Coming Back? 610
4.8. Modelling New Tax Code and Paying off VATRefund? 611
4.9. Banks on Earning Road Again? 612
4.10. Hryvna Exchange Rate Getting Floating toPower Inflation? 613
4.11. Consumers Supporting the Economy? 614
4.12. Conclusion 614
Epilogue 615
Financial Crisis in Eastern Europe:Road to Recovery 616
Editors` Vita 623
Authors` Vita 625