Belarus Taps IMF For Bail-Out -- Another Black Mark For Emerging Markets

Posted by: Mark Scott on October 23, 2008

Another day, another bail-out. No, I’m not talking about more funds for the global financial industry, but news on Oct. 23 that Eastern European country Belarus has asked the International Monetary Fund (IMF) for a reported $2 billion loan to prop up the country’s dwindling capital reserves. The former Soviet satellite already has secured $2 billion in financing from Russia and the country’s finance minister, Alexei Kudrin, says he might ask Western states for additional help.

Belarus is only the latest in a string of Central and Eastern European countries that have tapped international lending institutions after the freezing of global capital markets made it difficult to service foreign debt. Hungary, Serbia, and the Ukraine — as well as cash-strapped Iceland — all have gone begging for help in recent days. It’s just an example of how emerging markets worldwide also are feeling the pinch from the global financial crisis.

Ahead of a three-day summit on Europe and Central Asia at the end of October, the World Economic Forum also has weighed into the debate. Its key concerns for the region? "Current account deficits and high levels of external debt raise the risks of a hard [economic] landing. High dependence on foreign capital amplifies external vulnerability."

With an average current account deficit of 9% of GDP, Central and Eastern Europe definitely will feel the financial squeeze. Morgan Stanley reckons countries in the region hold approximately $1.65 trillion in foreign debt. And in Baltic states like Estonia and Latvia, which already are in recession, foreign currency-denominated debt stands at 30% and 24% respectively of total GDP.

Times certainly will get tougher for the countries, although it's worth pointing out the region is by no means uniform. The Czech Republic and Poland, for example, have small current account deficits and minimal exposure to foreign currency debt. Bulgaria and Hungary, on the other hand, face mounting financial problems as foreign currency loans represent more than half of the countries' entire loan book. Hungary's current account deficit in the second quarter of the year stood at roughly 6%. Bulgaria's was a staggering 24%.

That shows the financial crisis hasn't just cast a shadow over North America and Western Europe. While they didn't have access to subprime mortgages, economies across Central and Eastern Europe have been fueled by easy access to (predominantly foreign) credit. Now that it has been taken away, countries from Estonia to Bulgaria are having to tighten their fiscal belts.