Cold winds of austerity blow across Eastern Europe

Like us on Facebook

“In some cases – particularly Romania – they may even push the economies back into recession,” said Shearing and Oxley.

”But the alternative of doing nothing has its costs too. With markets quick to punish fiscal laxity, those countries with large amounts of foreign exchange-denominated debt, notably Hungary, are playing a dangerous game.”

Slovakia

Slovakia, which adopted the euro in January 2009, saw its budget deficit skyrocket to 7.3 percent of GDP in 2009 from only 2.2 percent a year earlier, while its economy dwindled by 4.7 percent.

Now Slovakia enjoys one of the fastest growth rates in Europe – Slovak Finance Minister Ivan Miklos predicts growth could reach 4 percent this year, versus the Finance Ministry’s June forecast of 3.2 percent.

However, Miklos warned that spending reductions will not be sufficient to meet budget deficit targets – thereby requiring the new administration to seek almost 600 million euros ($781 million) in additional revenue next year.

Miklos was quoted as saying that the country's 2010 budget deficit may exceed 7 percent of gross domestic product, compared with a target of 5.5 percent, due to inadequate tax revenue.

The administration of Prime Minister Iveta Radicova has precious little room cut the shortfall this year and is looking towards 2011 for consolidation efforts.

Additional revenue and spending cuts in the 2011 budget should amount to 1.7 billion euros, which would reduce the fiscal deficit by about 2.5 percentage points of GDP, according to the administration’s plan for its four-year term. A third of that amount will be generated by revenue increases, although Miklos didn't elaborate how that would be done.

By 2013, Miklos said, the country will try to reduce the deficit to between 2.7 percent and 2.9 percent of GDP – after the The European Union demanded Slovakia cut the deficit to less than 3 percent by then.

The International Monetary Fund (IMF) recently raised its forecast for Slovakia's public finance gap to 7.0-8.0 percent of GDP in 2010 from a prior 5.5 percent estimate.

"The fiscal situation has deteriorated significantly in the past years, the deficit in 2010 could be between seven and eight percent of GDP,"
said Mark DeBroeck, head of the IMF mission to Slovakia.

DeBroeck recommended budget cuts of 2.5 percent next year to allow Slovakia to cut the shortfall to below 3.0 percent of GDP by 2013 (as required by EU members).

He warned the gap could balloon to the 8-percent level if the new government did not take proper measures, as it "inherited a deficit which resembles Greek numbers."

Czech Republic

The Czech economy, driven largely by exports, is awakening from its worst recession in two decades after demand for its products collapsed western European markets.
Czech GDP climbed 1.1 percent annually in the first quarter of 2010, after contracting 3.2 percent contraction in the final three months of last year.

Finance Minister Miroslav Kalousek said the Czech government will take savings steps this year and in 2011 to guarantee it meets its budget-deficit targets,

Without any such cuts, he warned, the budget gap could reach 6.6 percent of GDP next year, compared with a target of 4.6 percent of GDP in 2011.

The new three-party government has also committed to reduce the deficit to within the EU-prescribed limit of 3 percent of GDP by 2013.

Moody’s Investors Service said it may upgrade the Czech credit rating from the current A1 if the government can successfully overhaul its public finances and ease the deficit.
The Finance Ministry predicts the economy will grow 1.6 percent this year and 2.3 percent in 2011, after a 4.1 percent contraction in 2009.

Ukraine

Ukraine’s new government recently agreed to a new 29-month stand-by agreement with the IMF, valued at about $15-billion.

In response to the IMF loan package, S&P raised its long-term foreign currency ratings on Ukraine by one level to B+ from B and the long-term local currency rating to BB- from B+.

The IMF agreed to disburse $1.9 billion of the loan basket immediately, allowing the Ukraine to use $1 billion of the first payment to help ease the budget deficit.

Ukraine's government has raised gas prices for households and heating companies to balance the finances of state energy company NAK Naftogaz Ukrainy and also agreed to cut the deficit to 5.5 percent of GDP this year and 3.5 percent next year.

The IMF wants Ukraine to reduce the budget deficit to 2.5 percent of GDP in 2012. In addition, IMF wants Naftogaz’s deficit to be “eliminated starting from 2011.”

The IMF will provide a second $1 billion for the state budget after the first quarterly review, the IMF said. The remaining $13 billion will go to central bank reserves.

“We believe that the IMF program will increase the chances of a stability-oriented policy measures that should increase the resilience of the Ukrainian economy and its public finances,” S&P said in the statement. “The IMF program also reduces the external vulnerability of Ukrainian economy by providing external financing.”

Romania

The IMF recently disbursed the fifth tranche of Romania’s loan deal, worth EUR 0.9-billion, after the government identified the fiscal cutbacks needed to keep the Fund program on track. The economy relies on a EUR 20 billion support package from the IMF.

Romania is on very shaky ground.
The economy slipped into recession in 2009 after enjoying vibrant growth for several years. Romania's GDP contracted 7.1% last year and the IMF expects it to slow another 0.5 percent this year.

The government has promised huge spending cuts to cut its massive budget deficits