Hungary:
The Hungarian economy is forecast to shrink by 1.6 per cent in 2009. Its external debt is expected to rise from almost 100 per cent of its GDP to at least 125 per cent of GDP by 2009. It has already received IMF help to the tune of $25 billion in October 2008. Its currency, the Forint, has nose-dived. It has lost 16 per cent from 1 January 2009 vs the Swiss Franc. Swiss Franc happens to be the currency of choice for households in Hungary to borrow. This weakening of the Forint has further pushed up the debt burden of households.

Romania:
The Romanian economy is forecast to grow at under two per cent this year, compared to nearly eight per cent last year. The fiscal deficit is expected to be 7.5 per cent of the GDP for 2009 vs 5.2 per cent of GDP for 2008. The current account deficit is a high 13 per cent of GDP. The worsening twin deficits and bleak employment situation does not bring good tidings for the economy for 2009. The rating agencies have cut Romania's debt rating to junk.

Bulgaria:
The Bulgarian economy is forecast to grow at under two per cent this year compared to over six per cent in the last two years. It current account deficit continues to be a high 24 per cent of GDP. While its fiscal position is strong, its external debt is almost zero.

Latvia:
The Latvian economic is forecast to shrink by about seven per cent for 2009. Latvian debt rating has already been cut to junk. Its IMF mandated austerity programme will cause the economy to sink further into recession.

Lithuania:
The Lithuanian economy is expected to shrink by about four per cent in 2009. Its unemployment is expected to jump to near double digits this year. It is on the rating agencies watch list for downgrade of debt ratings.

Estonia:
The Estonian economy will contract by almost a fifth in 2009. It is also on the watch list of the rating agencies for a downgrade of debt ratings. Its property market has taken a significant tumble over the last couple of years. It is estimated that 20 per cent of the mortgages are underwater (ie the house is worth less than the debt).

Given this situation, the credit default swap (CDS) markets have stared pricing in the looming defaults. For example in March, Latvia’s five-year CDS widened to 1114 basis points, while the cost of insuring Lithuanian sovereign debt against default for five years rose 25 basis points to 850 basis points. Hungary is at 619 basis points, Bulgaria is at 715 basis points, Romania is at 713 basis points. For comparison. Lehman Brothers CDS jumped from about 300 basis points to little more than 600 basis points a few days before it went bankrupt. The CDS data seems to indicate that market is clearly pricing in defaults for all these countries.

The major impact of the problems in Hungary and Romania will be borne by the banks in Austria, as they are some of the largest lenders in that region. Across Eastern and Central Europe, Austrian banks are thought to be responsible for over $280 billion, most of that denominated in foreign currencies. The amount could be equal to 80 per cent of Austria’s GDP.
The banks in Sweden have large exposure to the Baltic region (Latvia, Lithuania and Estonia). Sweden has already bailed out its banks by guaranteeing $173 billion of debts. But that alone may not be enough. The good news for Sweden is that the total exposure of their banks to Baltic states is about 20 per cent of Sweden’s GDP, a number that appears more manageable than the Austrian exposures.

Switzerland may be another country that could be impacted by all this. A significant portion of the household borrowings in Eastern Europe have been denominated in Swiss francs. According to a report by the Bank for International Settlements worldwide franc loans equivalent to around 675 billion U.S. dollars are in circulation - which was about 150 billion directly from Switzerland, 80 billion of Great Britain and about 430 billion US dollars through offshore financial centres. How many of these loans have gone bad is not known. But even if the failure rate is 20 per cent, the Swiss banks would lose a lot of money. Given that Switzerland has attempted to rescue its big banks, UBS and Credit Suisse, from the US sub-prime crisis, it could end up having to fork out more to rescue its banks again. A softening of the Swiss governments towards bank secrecy laws seems to point that the Swiss may finally be need to be in the good books of some of the powerful countries around the world.

Indian impact

It appears that India will not be directly impacted by the problems in East Europe. The second order impact on rest of Europe, will affect India. Indian companies and banks have significant dealings with Switzerland (both official and off the record!). India would also need to be prepared for a very tough global environment. It could use this global crisis to improve its infrastructure. (ie a repeat of 2001 technology crisis which Indian telecom companies effectively used to buy cheap telecom infrastructure whose benefits we continue to enjoy even today). The big worry is that its twin deficits (current account/fiscal) could keep it from effectively using this crisis. Sovereign defaults in East Europe would make the global investors risk averse and India may end up with very little foreign inflows that could put further pressure on the rupee. n