Slovakia, Poland, the Euro,

Slovakia is essentially a mini Poland but fiscally and currency-wise more like Finland, because Slovakia uses the euro, has lower state debt than Finland, and a population that generally has very little private debt. The banks lend money derived from local deposits and are healthier than their western counterparts.

Slovakia adopted the euro in 2009 did suffer a recession that year, but comparable to the one that hit the neighbouring Czech Republic, which kept its koruna independent currency. Large foreign investors such as Volkswagen, PSA, Kia, say they decided to expand operations in Slovakia because there was no currency risk with the destination markets.

Keeping an independent currency may be a desperate stabilisation tool for a country that is crisis hit and uncompetitive, but for Slovakia the currency union helps its exports and further economic integration with Austria and Germany.

In Poland the zloty’s sudden decline is putting economic growth at risk as it squeezes the 700,000 Poles – part of a nascent middle class – who took out mortgages denominated in foreign currencies, mostly Swiss francs. So far, people are making their payments, but as the zloty continues to fall against the franc there is a growing worry that it could choke off consumer spending.

Such a fear does not exist in Slovakia as there are no mortgages denominated in foreign currencies so this significant risk that is a problem for both Poland and Hungary does not exist in Slovakia...

The next election is unlikely to produce an anti-business government as even the left is committed to Slovakia's integration with the eurozone.

Who is doing well in the Eurozone and who is stagnating

Almost 40% of big business in Slovakia wants to hire and expand

Bratislava's Eurovea. Bratislava's downtown is buzzing
with activity and growth. 

Foreign investors operating in Slovakia believe the economic crisis is ending and expect their businesses to flourish in the coming months, according to an economic sentiment survey conducted among 166 investors from other European countries undertaken by seven foreign chambers of commerce in February and March 2011, Slovak spectator reported on 8 April.

Almost two thirds of investors in Slovakia expect the economic environment to improve significantly over the course of 2011.

Nearly 39% of the surveyed businesses said they will be looking to hire more employees this year.
We are optimists now too, since movement has returned to the Slovak economy, said Vladimír Slezak, the general director of the Bratislava-based branch of Siemens.

Growth and debt, check out the performance of Slovakia particularly GDP for 2011

Wall Street Journal interviews Slovak Prime Minister Iveta Radicova on the reasons why Slovakia refuses to bail out Greece with further loans

Wall Street Journal interviews Iveta Radicova on the reasons why Slovakia refuses to bail out Greece with further loans




http://online.wsj.com/video/slovak-pm-wants-rules-on-defaults-for-euro-area/27574DAA-D4C6-4FE8-B835-89E4A58BDE29.html 

Iveta Radicova is clearly an intelligent leader, and she explained that Slovakia is participating in an Eurozone insurance policy for the protection of the euro due to unforseen and unavoidable future circumstances.

However she politely suggested that the greek situation is not justifiable as a bailout, because it was hardly an unavoidable situation and that the indirect beneficieries of such bail-outs (often rich investors and banks) need to accept the risk of their investments and the tax payer cannot be there to pick up the pieces if the investor does not do their due dilligence. This is a point made by several economists over the years when bailouts started with Asia & Mexico under Clinton.

In other words the PM of Slovakia noted her and her country's aversion to a development model largely based on ever increasing borrowing. She expressed her solidarity with the greek people but not with the practices of their governments in the last 20-30 years in relation to debt.

This is not just words, Slovakia has a tiny national debt as a % of GDP which is even smaller than Finland and about half that of Germany at around 35%, moreover this is likely to decline further. One cound say that Slovakia is a very debt averse country culturally, and seems to be baffled by the prevalence of the credit card and other forms of indebtedness in the anglosaxon world.

The Slovak Prime Minister called for stronger regulation of euro-zone financial markets and for allowing overly-indebted countries to undergo and orderly default rather than throwing them new credit lifelines.

Earlier this year Slovakia, the newest and poorest of the 16-rich-nation currency group, caused a stir around Europe when it refused to be part of a EUR110 billion bailout for Greece, agreed on in May by euro-zone member countries and the International Monetary Fund. However it should remembered that Slovakia's share is fairly small as it is a small country of only 5 million people.

Why is Germany booming in a time of weak and state supported growth in the rest of the western world?

Something quite extraordinary is going on, the values of the ageing baby-boomer generation have hit the brick wall of debt (also known as leverage). 

The characteristic of most western societies from the 1980es onwards has been that  a rise in living standards for some has become increasingly reliant on borrowing from tomorrow's (fewer and poorer) taxpayers. This has been true particularly of countries like Greece, Britain, Ireland, Spain, Italy and of course the USA. Their formerly "dynamic economies" now seem to have been largely based on accumulating debts and boosting spending unsustainably. The recent world financial crisis simply brought forward the day of reckoning to affect some of the perpetrators.

Meanwhile Germany took a pragmatic view during the years of euphoria, it exported the consumer goods everyone else wanted now while keeping its own consumption moderate and its already high wages in check during this period. It didn't join the party, it just served the drinks for those that were demanding the high-tech machinery and automobiles and other manufactures that germans excel at.

Clustered around germany are a number of economies that in varying degrees followed the policies of Germany. Chiefly countries like Slovakia (more than the Czechs), Poland, Sweden, Denmark etc. They are also closely linked to germany through trade. Slovakia has and is benefiting from German and Austrian investment, and in turn it has become a good customer, in the crisis the Slovak economy almost mirrored the sharp german slowdown and swift recovery

Reading now old articles carrying scathing criticism of europe in magazines such as the economist, or the Financial Times during most of the decade from 2000 up to 2008 makes illuminating reading. With hindsight teutonic/continental economies seem to shine through now as sustainable, socially responsible, and intergenerationally fair systems, and are not suffering the long-term consequences the debts have brought about and anglo economies will feel for decades. Back then the anglosaxon press at best would characterise europe slow or ageing or not as fast growing as the USA. I see no grovelling apologies for these misguided opinions of the past. It seems that Germany's policies but also its admirable investment in the east is in the best tradition of building up the future not only for its own citizens but also for its neighbours. 

To back up my ideas about the lack of debt see the article below by one of the top US economists.

(Why is Germany doing well?) It's the lack of leverage

This contribution was authored by Carmen Reinhart and Vincent Reinhart.

Germany’s relatively robust comeback obviously requires a multi-part explanation. The very important dimension of its resilience in the current environment, where recoveries from the crisis, notably in the advanced economies, on the whole, have been disappointing.

Carmen M. Reinhart is Professor of Economics and Director of the Center for International Economics at the University of Maryland. She received her Ph.D. from Columbia University. Professor Reinhart held positions as Chief Economist and Vice President at the investment bank Bear Stearns in the 1980s, where she became interested in financial crises, international contagion and commodity price cycles.

We explored the experience of economies surrounding severe financial crises in a paper, After the Fall, presented at the Federal Reserve Bank of Kansas City’s Jackson Hole Symposium. As we pointed out, Germany was a notable outlier in the now-notorious credit and debt boom of the decade prior to the onset of the subprime crisis. Credit relative to nominal GDP fell about 11 percentage points during 1997-2007; during the same period, credit/GDP rose 80 percentage points for most of the advanced economies. Germany’s gross external debt/GDP fell about 5 percentage points during 2003-2007, while that ratio climbed by about 50% for other advanced economies. Germany’s property market cannot even be loosely characterised as part of the global bubble. In fact, real house prices fell 11% from 1997 to 2007. Unlike Japan, which was the other notable outlier during the credit boom, it did not have the burden of a high public debt. As a consequence, despite rapid increases in government debt since the crisis, Germany does not have a private or public debt overhang of the historic proportions confronting most other advanced economies. It follows that a long and painful deleveraging is not on the horizon. 

In this regard, Germany is the advanced economy counterpart to emerging markets in Asia and Latin America. Those economies also deleveraged during the tranquil booming years (as discussed in Reinhart and Rogoff, 2010). These emerging markets are not only recovering robustly—some are showing signs of overheating.

greek sovereign trials and tribulations and their impact

Although we do not believe in a further deterioration of the situation in Greece in the long term because the political climate in the country has changed in a way that has not been seen in 30 years. The important news is that reckless finances will become a thing of the past.

Just to clarify we do think that some of the hystrionic press about Greece defaulting was an attempt by traders to cause a self-fufilling crisis based on rumours so they can profit from their short positions.

The graph here shows just how bad the situation is compared to other european countries. This graph captures by how much greek politicians have led the country down a blind alley and how irresponsible the last 30 years have been.

Nevertheless it is clear now that there is a defacto economic government imposed on the club-med members of the EU. It also means that the norms of german financial conservativism will become best practice and in the long term that bodes well for Greece and the rest.

Central Europe vs. Balkans

But what about eastern europe and central europe? (for those that think they know the difference between central vs. eastern europe look at the map for your education...)

For one thing the crisis showed that countries with bad fiscal management suffer whether they are in the eurozone or not. Slovakia, Czech republic and Poland come out of all of this with more credibility as financial actors.

The countries with bad management of their finances and high corruption Greece, Romania, Bulgaria, and the rest of the balkans now seem to be a category of their own. We need a new name for it, but i think for now the Balkans+Romania will do just fine

Legendary commentator and economics professor Nouriel Roubini and his team share their views on the prospects for this region. Our conclusion from this is that given that we see the EURO as safe despite the greek melodrama, for central europe the likely outcome is that Slovakia will carry on being the only euro member in the region, and is likely -after a short pause- sweep all the FOREIGN DIRECT INVESTMENT for itself. This is the way we interpret the last comment on this piece.

What Greece’s Fiscal Crisis Could Mean for Eastern Europe

Mary Stokes and Jelena Vukotic

Feb 22, 2010 11:42AM

Eastern Europe & Southeastern EU will likely feel reverberations from Greece’s fiscal woes. While the possibility of contagion via trade and FDI channels is limited, transmission via the financial channel is a real risk in Bulgaria, Romania and Serbia, given the strong presence of Greek banks in these markets. Any direct spillover effects will likely be limited to these South East European economies, but the potential for indirect effects must also be taken into account.

On the positive side, Greece’s fiscal crisis highlights the comparatively better fiscal positions of EU newcomers in Central Europe. Nevertheless, troubles in the eurozone periphery could further delay euro adoption, which could weigh on emerging European assets going forward.

Grεεk dεbt disastεr

Posted by Tracy Alloway on Jan 18 10:40.

Here’s a singularly-arresting chart from Deutsche Bank’s excellent fixed income team:

That is foreign banks’ holdings of European government debt, and there is an unexpected standout: Greece.
The chart highlights two concerns; firstly, the potential for banks to be burned by the situation in the Hellenic Republic, and secondly, the extent to which the country has relied on outsiders to finance its deficit in recent years.
Here are the DB analysts, headed by Gilles Moec, with a bit more detail:

Such inflows leave an economy vulnerable to a sharp withdrawal of funds at some point in the future should foreigners lose confidence or face liquidity constraints that prevent them from maintaining this exposure. A breakdown of net international investment positions for some of the more vulnerable EMU economies highlights this predicament.
Financing of C/A deficits generally takes two forms – debt creating and non-debt creating inflows. Non-debt related inflows refer to FDI and equity, debt-related inflows can be in the form of either portfolio flows into domestic public or private fixed income markets or loans (e.g. trade credit, syndicated loans). In Greece’s case the majority of its negative net international investment position relates to portfolio flows into the public sector which foreigners can choose to sell whenever they wish. At end-Q3 foreigners held EUR216bn of Greek government debt (72.3% of the total market, 90.2% of GDP), having doubled their position since end-04. Given recent downgrades and another round of revisions to budget data from previous years, a sharp slowdown or even reversal of inflows from foreigners into the local debt market has become an increasing risk.

Matters are made worse by the fact that the ECB has taken a hardline stance on the collateral criteria for its liquidity ops. That means if Greece is downgraded by Moody’s (the only agency still rating it at the A-level) its debt will no longer be eligible for the ECB facilities once the central bank raises its collateral-threshold back to its original level of A-.

Greece is probably hoping that foreigners will continue to finance the government for the rest of 2010, some investors have been piling in to Greek bonds in anticipation of a bailout, but there are signs that may get more difficult.

The country’s Public Debt Management Agency has already said it will not sell any bonds to the market this month, instead opting to focus on T-bills. Bid-to-cover ratios for last week’s auction of 52-week bills was fine at 3.05, but yields rose 119bps to 2.2 per cent. Which means, in short, that investors are demanding more and more of a premium for holding Greek debt.
If foreigners do retreat from Greek debt, the government will no doubt be hoping that its domestic banks could step in to replace them. That however, may also prove problematic, according to DB:

Full financing from the domestic banking sector is probably also not viable. December saw the government sell EUR2bn in bonds in the form of a private placement to 5 banks, 4 of which were Greek. Should the government rely entirely on its domestic banking sector for financing this year, it would result in a 163% increase in their holdings of Greek government debt relative to end- October (EUR32.5bn)1. In the absence of an increase in banking sector liabilities, Greek banks would move from holding 8% of their assets in Greek government debt at end October to 20.2% of their total assets by end-2010. This would only materialise if Greek government debt could not be posted at the ECB as collateral but would undoubtedly translate into a sharp fall in the stock of private sector credit and a more negative growth outcome than is projected by the government, endangering the government’s fiscal targets.

The case against sudden austerity

A currency union with Germany was supposed to work like this. The peripheral euro countries would earn enough and produce enough useful goods that Germany would buy competitively as to create no significant trade deficit. 

 

In short Germany needs to accept a decline in its trade surplus with the PIGS, and the PIGS need to adopt german style fiscal management and a big reduction in their public sectors.

 

The reasons are explained below:

 

Lots of sturm und drang lately in the eurozone. Germany has decried the profligacy of its southern peers, especially Greece. Athens, meanwhile, feels resentful about what it perceives as Berlin’s bullying. Amid a rash of strikes in Greece, Spain and Portugal, emotions are running high. Yes, Greece and the other big-spending Club Med countries must tighten their belts. They also need to increase their competitiveness. But to insist, as Berlin has done, that austerity is the only way out for these countries is both unrealistic and untrue. Germany must play a role too.
Greece, Italy, Spain and Portugal, for example, run large current account deficits. Last year, these deficits summed to about €102bn, about half of which was due to trade within the eurozone. Germany, meanwhile, has a large current account surplus – last year it reached about €80bn – about half of which is also due to trade with its eurozone partners. For the past ten years, this relationship worked to everyone’s favour. Germany enjoyed export-led growth. Club Med countries provided much of the demand for those exports. But this symmetry is as true of the bust today as it was of the boom then.

Imagine, for a moment, that the Club Med countries somehow manage to deflate their way to recovery and shrink their budget deficits to Maastricht-prescribed levels. To do that would entail a massive reduction in spending equivalent to €120bn, or about 6 per cent of German output. One consequence of this contraction would be a huge slump in demand, including for imports.

Germany would not be able to substitute with increased exports to other countries. The economy, which is already stalled and only currently propped up by exports, would go into reverse. Berlin would then face some tough choices. One of them, as Lombard Street economist Brian Reading suggests, would be to sustain a substantial rise in its budget deficit to compensate for lost demand elsewhere. If only out of self interest, German opposition to a Greek bail-out plan is therefore likely to soften.

Der Spiegel - Slovakia's Surprising Financial Strength

Excellent and informative article by the respected German magazine Der Spiegel about Slovakia.

http://www.spiegel.de/international/business/0,1518,629857,00.html

Eurozone and Slovakia look set to grow faster

VIENNA & Bratislava, There are indications that European Central Bank will upgrade their growth forecasts for the euro zone economy when new numbers are published next month, ECB Governing Council member for Slovakia Ivan Sramko said to Reuters.

"There is some news now that there will be a better forecast for this year and next year but this is all I can say," Sramko, governor of Slovakia's central bank, said on the sidelines of an Austrian central bank conference in Vienna.

Sramko, asked about the exchange rate of the euro against the U.S. dollar and the Chinese yuan, said that it was his personal opinion that policymakers should coordinate more on foreign exchange rates.

He also said the ECB has discussed which interest rate to put on its December tender of 12-month liquidity "many times" but declined to be drawn on those discussions

Volkswagen production in Slovakia to to triple

Despite the bad news since the beginning of the year, it now seems that car companies are increasing car production, and VW seems to be investing in their factories in our small country in a major way.

The production capacity of Volkswagen's plant in Bratislava will increase to 400,000 following the launch of serial production of its New Small Family car (called "UP!"), VW Slovakia CEO Andreas Tostmann has told the company magazine.

VW's production in Bratislava reached 187,000 in 2008.

"We'll begin production of the new model in early 2011. The number of employees will rise by 1,500, while we'll invest €308 million in the production of this small innovative car," said Tostmann, adding that the move will also lead to the introduction of "new structures" at the plant in Bratislava.

"We've proven that we're able to produce four models under a single roof. It'll be five with the New Small Family one," said Tostmann.

Volkswagen Slovakia achieved a profit of €283.5 million in 2008, which represented an increase of 25.9 percent year-on-year.

On the news front, a turnaround may come already in the fourth quarter, Finance Minister Jan Pociatek said after poor first quarter data on Friday.

'We expect that the situation will improve in the coming quarters,' he told a news conference.

'According to our data we may get mildly into the positive territory in the fourth quarter.'

The ministry had forecast a 2.4 percent full-year economic growth in February. An updated forecast is expected next month.

(Reporting by Martin Santa, writing by Jan Lopatka) Keywords: FINANCIAL SLOVAKIA/FINMIN

(prague.newsroom@thomsonreuters.com; Reuters Messaging: jan.lopatka.reuters.com@reuters.net; +420-224 190 474)

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The crisis explained

how the crisis will affect everyone and who created it.

Happily in Slovakia the value of all mortgage loand is only 17% of Slovak GDP
in the UK its well over 350% of UK GDP



The Crisis of Credit Visualized from Jonathan Jarvis on Vimeo.

Slovakia's timely euro entry at the time the door to the euro is closing possibly for the forseeable future...

An interesting article about our unique circumstances in Slovakia during the global turmoil...

Slovakia's Euro Entry

By Radoslav Tomek and Andrea Dudikova, Bloomberg news (bloomberg.com)

Dec. 31 (Bloomberg) -- Slovakia, which becomes the 16th member of the euro region tonight, is counting on the currency to help shield it from the brunt of the global crisis that’s pummeling emerging markets.

Slovakia, which joined the European Union in 2004, will be the second former communist country to make the switch after it held down inflation, debt and its budget deficit. The former Yugoslav republic of Slovenia was admitted two years ago.

The nation is making the change while eastern European currencies and economies plunge because of the worldwide credit squeeze. The European Central Bank may balk at further expansion of the euro bloc for now, foiling other countries’ efforts to gain financial support and fend off deeper recessions.

“We are watching our neighboring countries, whose situation is getting more and more complicated because of the crisis,” Finance Minister Jan Pociatek said in a Dec. 23 phone interview from Bratislava, the Slovak capital. “Now it’s clear that we are making the switch at the right time.”

The region’s economic and market slump is prompting most of the EU’s eastern states, including Poland, Hungary and the Baltic states of Latvia and Estonia to follow Slovakia’s lead and push for faster euro-region membership. Whether there are capable of achieving the numbers and convincing eurozone members to accept them now is a big question. The most likely scenario is postponement beyond the end of this worldwide recession.

While the Slovak koruna remained locked and unchanged in value to the euro in preparation for the Jan. 1 changeover, the Polish zloty lost 24 percent, the Czech koruna dropped 11 percent and the Hungarian forint fell 13 percent in the second half.

ECB Aid

Hungary on Oct. 16 was forced to accept a 5 billion-euro ($7.2 billion) loan from the ECB, and the EU is considering an additional aid package for Latvia, a former Soviet republic. Latvia, once the fastest-growing economy in the 27-nation EU, is suffering from the deepest recession in the bloc.

Slovakia contrasts with the Czech Republic, a former federal partner in the defunct Czechoslovakia and the only EU nation without a euro target date. While President Vaclav Klaus opposes adoption, Prime Minister Mirek Topolanek said the Cabinet may set a date by next year.

As other countries in the region struggle, the Slovak administration is negotiating with six investors to spend at least 5 billion koruna ($237 million) each to build factories in Slovakia, Economy Minister Lubomir Jahnatek, 54, said on Dec. 16.

Volkswagen AG, Europe’s largest carmaker, cited the switch as a key reason for choosing to upgrade its Slovak factory and prepare it for a new car model, Jahnatek said. The German carmaker originally planed to put the project in the Czech Republic.

Credit Risk

The spread between Polish and Slovak five-year credit-default swap rates increased to 85 basis points on Dec. 26 from 9.5 points on Sept. 22, meaning it would cost 85,000 euros ($120,900) more to protect 10 million euros of Polish debt from default, compared with Slovak debt.

Though the Frankfurt-based European Central Bank is willing to provide aid to non-members, it will probably be more wary about widening the euro region during the next several years.

Executive board members, including Juergen Stark, say the current monetary union is being tested by the financial meltdown and are concerned that many new members, who founded free-market systems starting in 1989, have yet to prove they have stable- enough economic development, economists say.

“The political case for euro entry may have strengthened in the context of the current crisis, but the economic obstacles to joining have not gone away,” said Audrey Childe-Freeman, a senior currency analyst with Brown Brothers Harriman & Co. in London.

Lithuanian Rejection

The application by Lithuania to adopt the euro at the end of 2006 was vetoed because of concern its inflation rate would soar once in. The rate jumped from 3.6 percent in May 2006, when its bid was rejected, to 12.5 percent in June. Hungary was forced to drop its 2010 target date after the deficit ballooned to the widest in the EU.

“The ECB does not only require a nominal convergence but it wants a sustainable convergence,” said Laurent Bilke, an economist at Nomura International Plc in London.

Slovakia was successful in keeping inflation below the euro- adoption limits because of the record strength of its currency, the koruna, which capped import prices. Its budget deficit was kept under control because of increased revenue from economic growth.

Gross domestic product expanded a record 14.3 percent in the fourth quarter of last year and grew an annual 7 percent in this year’s third quarter. The global crisis will slow growth to 4 percent next year, the Paris-based Organization for Economic Cooperation and Development said on Nov. 25. Still, that contracts with 2.5 percent for the Czechs, 3 percent in Poland and Hungary’s economy may slip into recession, the OECD said.

Currency ‘Shield’

Adoption of the euro will act as “as a shield against the global turmoil,” said Elizabeth Gruie, a currency strategist at BNP Paribas SA in London. “It’s clearly a buffer against the financial stress we’ve had.”

In Slovakia, citizens snapped up 1.2 million packages, which contained a basic set of euro coins, before the switch. Some bank branches and the post office sold out within hours after sales began on Dec. 1, said Igor Barat, the government’s euro coordinator.

“Of course I am happy,” said Marek Farkas, a 37-year old waiter in Bratislava. “It helps Slovakia’s image. Look how envious our neighbors are. They would love to have it too.”

Last Updated: December 30, 2008 18:00 EST

State vs. Private sector

An old interview with a great economist. What he says has been common sense since the 1930es until the mid 90es. Its strange how this view would be seen as leftist these days... Especially if the same words were uttered by a politician anywhere in europe including Slovakia but particularly in the english speaking countries.

Government and the Market:
INTERVIEWER: Who knows best? government or the free-market system?

JOHN KENNETH GALBRAITH: I have no doubt on that. The correct balance is pragmatic. If the market system, as you call it, has its own things that it does very well, no one could question, for example, its ability to make automobiles or grow food or provide a large part of the substance of life. But then there's an area where it doesn't work, and the distinction between
the areas where it works and the areas where it doesn't work is the basis of sound policy.

We're not, as we talk, in the United States having a big, sometimes quite mindless, argument about education. Everybody agrees that education is a public service, or almost everybody, and has to be handled, financed by the state, by the government. On the other hand, there's nobody, so far as I'm aware, suggesting that the state should take over the manufacture of automobiles, which I just mentioned, or farm products, or a wide range of other things. So it's a practical judgment that has to be made in the specific case, and it doesn't lend itself to the kind of broad theory implied in your question.

INTERVIEWER: At the end of the day, is morality at the heart of economics?
JOHN KENNETH GALBRAITH: No, but it can be. We're talking today in a very rich country, at a very rich time, and at the time we talk a large part of the American population, 10, 15 percent, are living below the level of enjoyment. They're hungry, they're ill housed, they are sick, and very largely as the result of the lack of income, mostly as the result of the lack of income. I would like to see a minimum income for everybody so that you have a life-supporting safety net. I think it's something a rich country like the United States can afford. And I'm not the only one with that view. Conservatives will say that people endowed [that way] won't work. Well, that's quite possible, but I'm impressed with the fact that leisure, if you're rich enough, is also a very good thing. In the past, often I've walked through Harvard Yard and have had one of my colleagues say to me, "Ken, aren't you working too hard?" Excessive work, leisure can be very good for a college professor, or somebody of affluence. Work can be unnecessary.