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The unravelling of the eurozone sovereign debt crisis throughout 2011 and 2012 is placing increasing pressure on Eastern Europe, as Western European banks continue to withdraw liquidity from the region. An ensuing credit crunch could potentially halt economic growth across a number of regional economies, with both businesses and consumers hit by credit restrictions and falling expenditure levels. Nonetheless, Eastern Europe is expected to see positive annual real GDP growth in 2011 and 2012.
Source: Euromonitor from trade sources/national statistics
Despite the very real threat of a credit crunch in 2012, Eastern Europe as a whole is expected to perform relatively well in the medium term, seeing average annual real GDP growth of 3.7% over 2011-2015. While not spectacular, this rate of economic expansion exceeds most advanced economies, many of which are now facing a recession. Nonetheless, the eurozone crisis contagion has already spread into Eastern Europe, with Hungary potentially becoming the first EU nation to default. As of mid-January 2012, the country is in negotiations with the IMF for a financial package as its domestic currency continues to plunge and borrowing costs soar.
Although many Eastern European nations were bailed out by the “Vienna Initiative” in 2008 and 2009, which combined international organisations and Western banks, a similar action seems highly unlikely in 2012. Most Western regulators are supporting a strategy of reducing exposure to brittle emerging markets, believing that Eastern European banks should lend based on local refinancing conditions, without relying on Western subsidiaries.
Countries with high budget deficits and an overreliance on Western lenders remain most vulnerable to further shocks, with Romania and Latvia especially at risk. Russia and Poland, due to their large domestic markets and strong economic growth, are best placed to ride out the storm, with Russian investors in a strong position to expand operations across the region. Eastern European consumer expenditure is projected to expand by 16.3% in real terms over 2011-2015, far outperforming Western Europe’s anticipated 4.5% in real terms over the same period.