Jens Jungmann / Bernd Sagemann (Eds.)
Financial Crisis in Eastern Europe


GABLER RESEARCH


Jens Jungmann
Bernd Sagemann (Eds.)

Financial Crisis
in Eastern Europe
Road to Recovery
With a foreword by Michael Müller-Wünsch
and an epilogue by Dirk Schreiber

RESEARCH


Bibliographic information published by the Deutsche Nationalbibliothek
The Deutsche Nationalbibliothek lists this publication in the Deutsche Nationalbibliografie;
detailed bibliographic data are available in the Internet at .

1st Edition 2011
All rights reserved
© Gabler Verlag | Springer Fachmedien Wiesbaden GmbH 2011
Editorial Office: Stefanie Brich | Heiko Ripper
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ISBN 978-3-8349-2740-8


Foreword

At the end of the first decade of our new century the global economic system
was buffeted by unexpected events. The global economy had not been prepared
for such developments. At the outset the imminent disruption might have been discussed within the confined circles of political committees and intellectual societies,
but never in depth by senior general management in the global business community or the public sector. But this global crisis is comprised of many regional jigsaw
pieces and the events were triggered and accelerated by the so-called domino
effect as a consequence of the interlinking and interlocking worldwide financial
and trade systems. Nevertheless they need to remain fitted together if our global
system is to function in the future too. In such circumstances we routinely tend to
place our focus on regions like the US, mainland Asia, South America, Middle East
or Western Europe.
This book addresses an area of great economic interest in a manner never seen
before. Eastern Europe is one of the jigsaw pieces and dominos which fall into the
maelstrom of the global developments. Yet, this is also a very specific region with various culture differences on one hand and manifold different economic foundations
on the other. The editors, Dr. Bernd Sagemann and Jens Jungmann, took the opportunity to combine their personal knowledge of this region with local knowledge
gathered from experts on the ground to bring about a compelling and comprehensive status report with regard to Eastern Europe. The thorough analyses and the
depth of each country description contained in the book provide an overview of the
financial and economic potential and capabilities of the Eastern European region

which has never been the case before.
Therefore, we would like to thank the editors and the individual authors for their
efforts and contributions in generating a valuable and enhanced understanding
of this region, which along with the BRIC countries, is one of the most fascinating
developing regions of our hemisphere. This book is a unique conception and should
become a standard for the evaluation of the financial and economic status of the
region for practitioners and likewise for the scientific community.

Foreword |

5


With the in-depth knowledge derived from these comprehensive essays, we
should hopefully be more prepared for future economic developments, and events
such as the global financial meltdown should no longer be such a surprise.
I expect that many readers will appreciate the straightforward and accessible
style with which this publication treats this complex matter.
Berlin, December 2010

Prof. Dr.-Ing. Michael Müller-Wünsch

6

| Foreword


Preface

“The story of the boom and crash of 1929 is worth telling for its own sake. Great

drama joined in those months with a luminous insanity. But there is the more somber
purpose. As protection against financial illusion or insanity, memory is far better than law.
When memory of the 1929 disaster failed, law and regulation no longer sufficed.
For protecting people from the cupidity of others and their own, history is highly utilitarian.”
John Kenneth Galbraith (The Great Crash 1929)

The end of a journey always comes back to its beginning. Why do financial crises
occur? Do they have the same root causes? Are the solutions the same? Ten years after the Asian financial crisis 1997-98 ended, the US subprime crisis in autumn 2008
had plunged the world into a deep recession. The parallels to the previous regional
and global crises, especially the great Depression of 1929-33, are obviously. The world
financial crisis 2008-2010 has hit Central and Eastern Europe harder than the rest of
the world – the Eastern Europe financial crisis resembles the Asian financial crisis of
1997-98 within the same fundamental problems of excessive inflows of short-term
bank credits, enticed by pegged exchange rates, leading to large private foreign debt.
This publication firstly gives a general overview about the great subprime credit
crisis and its spill-over to Eastern Europe. Subsequently the countries Bulgaria, Czech
Republic, Hungary, Lithuania, Poland, Romania, the Russian Federation, Serbia,
Slovakia and Ukraine are analyzed with regard to their individual situation before
this era, the impacts being faced, their attitudes and forces against the effects and
their position afterwards, giving an outlook for the upcoming years.
Special thanks are given to the authors of the country profiles and their lasting
spur during editing. Particularly many thanks to Ms Agnieszka Ogórkiewicz and
Mr Richard Scalé, Rödl & Partner, who both rendered the timely publication possible
with their great commitment.
Hamburg, December 2010

Bernd Sagemann

Jens Jungmann


Preface |

7



Overview

Foreword _____________________________________________________________ 5
Preface _______________________________________________________________ 7
Overview _____________________________________________________________ 9
List of Abbreviations ___________________________________________________ 11

The World Financial Crisis ____________________________________19
The Great Subprime Credit Crisis and its Impact on Eastern Europe __________ 21
Bernd Sagemann & Peter Reese

SpeciƂc Areas of Crisis in Eastern Europe _____________________63
Bulgaria: The Deferred Crisis ____________________________________________ 65
Minko Karatchomakov
Czech Republic: Crisis Postponed – Navigation to Recovery ________________ 109
Rene Vazac
Hungary: A Country Hit Hard __________________________________________ 177
Roland Felkai
Lithuania: The Return of Opportunities __________________________________ 257
Tobias Kohler
Poland: (Po)Land of Opportunity ________________________________________ 315
Jens Jungmann
Romania: Politics do matter____________________________________________ 377
Joerg Gulden


Overview |

9


Russian Federation: The Rocky Road ___________________________________ 413
André Scholz
Serbia: Serial Tensions amidst Recovery _________________________________ 471
Nicole Arnold
Slovakia: Small Land of Big Changes ____________________________________ 517
Maroš Tóth
Ukraine: Impact and Recovery from the Crisis________________________________581
Klaus Kessler

Epilogue __________________________________________________ 621
Financial Crisis in Eastern Europe: Road to Recovery ______________________ 623

Editors` Vita _________________________________________________________ 631
Authors` Vita ________________________________________________________ 633

10

| Overview


List of Abbreviations

ABS


Asset Backed Securities

AIG

American International Group

AMBAC

American Municipal Bond Assurance Corporation

ARM

Adjustable Rate Mortgage

ASEAN

Association of Southeast Asian Nations

AT

Austria

BA

Bratislava Region (Slovakia)

BB

Banskobystrický Region (Slovakia)


bbl

Barrell

BCPS

Bank Credit ti private sector

BG

Bulgaria

BKV

Budapesti Közlekedési Vállalat

BMI

Business Monitor International

bn, bln

Billion

BoA

Bank of America

BPO


Business Process Outsourcing

BRIC

Brazil, Russia, India, China

CDO

Collateralized Debt Obligations

CDS

Credit Default Swaps

CEE

Central Eastern Europe

CEFTA

Central European Free Trade Agreement

List of Abbreviations |

11


CESEE

Central East and South East Europe


éEZ

éeské energetické závody a.s.

CHF

Swiss Franc

CIS

Commonwealth of Independent States

CLN

Credit Linked Note

CMT

Constant-Maturity Treasury

CNB

Czech National Bank

CO2

Carbon dioxide

COMECON


Council for Mutual Economic Assistance

CPDO

Constant Proportion Debt Obligation

CPI

Consumer Price Index

CPPI

Constant Proportion Portfolio Insurance

CPT

Corporate profit tax

CR

Czech Republic

CRD

European Capital Requirement Directive

CSO

Czech Statistical Office


éSSD

Czech Social Democratic Party

CTP

Common Trade Policy

CZ

Czech Republic

CZK

Czech Crown

DE

Germany

e.g.

for example

EAGGF

European Agricultural Guidance and Guarantee Fund

EBRD


European Bank of Reconstruction and Development

EC

European Commission

ECB

European Central Bank

12

| List of Abbreviations


ECOFIN

Economic and Financial Affairs Council

EEC

European Economic Community

EERP

European Economic Recovery Plan

EGF


European Globalisation Adjustment Fund

EMU

Economic and Monetary Union

ERM

Exchange Rate Mechanism

ESA

European Space Agency

etc.

et cetera

ETI

Enabling Trade Index

EU

European Union

EUR

Euro


EURIBOR

European Interbank Offered Rate

FD

Federation

FDI

Foreign Direct Investment

FDIC

Federal Deposit Insurance Corporation

FED

Federal Reserve Board of Governors

FHLC

Federal Home Loan Corporation

FNMA

Federal National Mortgage Association

FR


France

FSSP

Financial Sector Support Programme

FX, f/x

Foreign Exchange

GDP

Gross Domestic Product

GE

General Electric

GSE

Government Sponsored Enterprises

HU

Hungary
List of Abbreviations |

13



HUD

Department of Housing and Urban Development

HUF

Hungarian Forint

ICT

Information and Communication Technology

ICTY

International Criminal Tribunal for the former Yugoslavia

IFC

International Finance Corporation

IKB

Deutsche Industriebank AG

IMF

International Monetary Fund

Invega


Governmental guarantee institution

IR

Ireland

IRB

Investiêná a rozvojová banka

ITD

Hungarian Investment and Trade Development Agency

JPY

Japanese ¥en

KAMAZ

’ÈÔÙÒÐÑ ÈÊÚÖÔÖÉÐÓäÕãÑ ÏÈÊÖÌ/ Kamskiy avtomobilny zavod

km

Kilometer

KR

Košický Region (Slovakia)


L´S-HZDS

ėudová strana - Hnutie za demokratické Slovensko

LHS

Left hand side

LIBOR

London Interbank Offered Rate

LTL

Lithuanian Litas

LVL

Latvian Litas

M&A

Mergers & Acquisitions

m, mln

Million

MALEV


Hungarian Airlines

14

| List of Abbreviations


MAV

Hungarian State Railways

MBS

Mortgage-backed securities

MERCOSUR

Mercado Común del Sur

MNB

Hungarian Central Bank

MNE

Multinational Enterprise

MPO

Ministry of Industry and Trade (Czech Republic)


MSZP

Magyar Szocialista Párt - Hungarian Socialist Party

MWh

Megawatt hour

MWt

Megawatt thermal

NAFTA

North American Free Trade Agreement

NATO

North Atlantic Treaty Organization

NBH

National Bank of Hungary

NBP

National Bank of Poland

NBR


National Bank of Romania

NBS

National Bank of Serbia

NBS

National Bank of Slovakia

NBU

National Bank of Ukraine

NERV

Národní ekonomická rada vlády

NES

National Employment Service

NL

The Netherlands

No.

Number


NR

Nitra Region (Slovakia)

NSZZ

Niezaleŏny Samorzâdny Zwiâzek Zawodowy „Solidarnoıä” –
Independent and Self-Governing Trade Union Solidarnoıä

ODS

Civic democratic party

OECD

Organisation for Economic Co-operation and Development

List of Abbreviations |

15


OLAF

European Anti-fraud Office

OTC

over-the-counter


p.a.

per annum

p.p.

percentage points

PAYG

pay-as-you-go

PC

Partidul Conservator

PD-L

Partidul Democrat-Liberal

PE

Private Equity

PL

Poland

PLN


polish zloty

PO

Prešovský Region

PRIBOR

Fixing of Interest Rates on Interbank Deposits

PSD

Partidul Social Democrat

Q

Quarter

R&D

Research & Development

RHS

Right hand side

RO

Romania


RON

New Rumanian Leu

RPNM

Annual percentual rate of costs

RSD

Serbian Dinar

RUB

Russian Ruble

SDR

Special Drawing Rights (to and from SKK)

SEE

Southeast Europe

SEK

Swedish Krona

16


| List of Abbreviations


SIEPA

Serbia Investment and Export Promotion Agency

SLO

Slovenia

SME

Small and medium sized entities

SoDra

State Social Insurance Fund Board

SOFIX

Aktienindex der bulgarischen WP-Börse

SP

Spain

SPV


Special Purpose Vehicle

SR, SK

Republic of Slovakia

SSC

Shares Services

SSK

Slovakian crown

SzDSz

Szabad Demokraták Szövetsége - Alliance of
Free Democrats

SZRB

Slovak Guarantee and Development Bank

TN

Trenêiansky Region (Slovakia)

TPCA

Toyota Peugeot Citroën Automobile


TT

Trnavský Region (Slovakia)

TWh

Terawatt hour

UAH

Ukrainian Hryvna

UDMR

Hungarian Democratic Union of Romania - Uniunea
Democratà Maghiarà din România

UEFA

Union of European Football Associations

UK

United Kingdom

UNCTAD

United Nations Conference on Trade and Development


UNPR

National Union for the Progress of Romania –
Uniunea Nationala pentru Progresul Romaniei

US

United States

List of Abbreviations |

17


USA

United States of America

USD

US-Dollar

VAT

Value added tax

VILIBOR

Vilnius Interbank Offered Rate


VUB

Všeobecná úverová banka

WTO

World Trade Organization

WW

World War

y-o-y

year-on-year

YTM

Yield to Maturity

ZA

Žilinský Region (Slovakia)

18

| List of Abbreviations




The World Financial Crisis


The Great Subprime Credit Crisis
and its Impact on Eastern Europe
Bernd Sagemann & Peter Reese

The Great Subprime Credit Crisis and its Impact on Eastern Europe |

21


“Collateralized debt obligations … have gotten much too sophisticated, are priced
by extraordinary mathematical models, and are very difficult to value. I think
people are going to be frightened to deal with those things for a long time.
A lot of them are just going to disappear, because they’ve been tried; they don’t work.”1
Alan Greenspan, September 2007

1.

Introduction

The current global financial crisis is the worst the world has seen since the Great
Depression during 1929-33. In 2008, clouds were gathering on the financial horizon. US house prices had peaked in 2006 and adjustable mortgage rates had risen,
damaging the balance sheets of highly indebted households and undermining faith
in mortgage-backed securities (MBS). It became evident that a variety of securitized assets, some quite highly leveraged, were far riskier than advertised.
Prior to September 2008, global aggregate demand had remained robust. Trade
was not in rapid decline. The biggest problem many countries were facing was the
spike in commodity prices in the previous 18 months, peaking in the spring and the
summer of 2008.2 The burst of the bubble and the following subprime credit crisis

evolved into a global credit crunch with a prolonged impact on the financial architecture as well as the real economy worldwide. In particular in the Eastern European countries, emerging after the fall of the ‘iron curtain’ and some of them after
joining the European Union, have been suffering considerably.

1 Kevin Phillips, Bad Money, 2008, p. 96.
2 Commission on Growth and Development, Post-Crisis Growth in Developing Countries, A Special Report of the
Commission on Growth and Development on the Implications of the 2008 Financial Crisis, 2010, p. 5.

22

| Bernd Sagemann & Peter Reese

J. Jungmann, B. Sagemann (Eds.), Financial Crisis in Eastern Europe,
DOI 10.1007/978-3-8349-6553-0_1,
© Gabler Verlag | Springer Fachmedien Wiesbaden GmbH


2.

The Great Subprime Credit
Crisis and its Global Impact

The severe worldwide recession – which in most countries began to show up
in 2008 – was triggered by the housing bubble in the USA. This kind of economic
bubble affected a vast part of the US housing market. On the domestic level, US
house prices more than doubled from 2000 to 2006 but started to decline from
summer 2006 onwards. Between July 2006 and June 2009 the S&P/|Case-Shiller
Home Price Index shows a price drop of about 33% for average US house prices.
For 2008 only, the average US house prices fell by nearly 20% which is the largest
annual decrease in the index history.3
As a result the average foreclosure rates among US homeowners more than tripled from about 1|million per month in 2006 to above 3 million per month in 2008.

This caused severe losses for banks and investors which were exposed to the real
estate market via subprime- and Alt-A mortgage loans, MBS or Collateralized Debt
Obligations (CDO) and other securitized debt instruments which were financing
the housing bubble. The extent of the losses resulting, led to a severe credit crisis
which has become publicly known as ‘the subprime credit crisis’.
The subprime credit crisis triggered unprecedented turmoil in the worldwide
capital markets. The crisis started to become public for the first time on 4 March
2007 when HSBC announced a write-off of 11 billion USD in subprime related
mortgage debt, which was followed by a series of banks and hedge funds that had
to declare huge losses and were forced to recapitalize. In summer 2007 the crisis
infected several money market funds which invested in structured credit securities
and in consequence were impelled to close the fund. In 2008 the crisis developed
further: firstly the collapse of Bear Stearns in March and later Washington Mutual, which were both taken over by JPMorgan. The crisis culminated in September
2008 when Lehman Brothers went bankrupt – the largest bank bankruptcy in history so far – and Merrill Lynch had to sell itself to the Bank of America (BoA). At
the same time the two remaining American investment banks, Goldman Sachs and
3 The S&P/|Case-Shiller Home Price Indices measure the residential US housing market by tracking the changes
in the value of the residential real estate market in 20 metropolitan regions across the US. To measure housing
markets, the indices use the repeat sales pricing technique developed by Karl Case and Robert Shiller. This
methodology collects data on single-family home re-sales, capturing re-sold sale prices to form sale pairs. Cf.
Standard & Poor’s, S&P/|Case-Shiller Home Price Indices, 2009, />index/CS_HomePrice_History_063055.xls (retrieved on 25 July 2009).

The Great Subprime Credit Crisis and its Impact on Eastern Europe |

23


Morgan Stanley, applied for a bank license and were seeking financial support from
outside investors ending up selling stakes to Warren Buffet and Mitsubishi Financial Group respectively.
In the following months several of the world’s largest banks and financial institutions had to be bailed out by the taxpayer and as a result were (partly) nationalized – among those banks Citigroup Corp., BoA, AIG, Royal Bank of Scotland, Halifax Bank of Scotland/|Lloyds TSB, Fortis, Dexia, Hypo Real Estate or Commerzbank.
From the beginning of the crisis in 2007 until the first half of 2009 just in the US the

total number of regional banks which had to declare insolvency and got under the
receivership of the FDIC went up to 74.4
To many the burst of the global crisis has come up as a surprise, wondering
how this severe global credit crisis could happen, how seriously and long lasting
it would be and what implications were to come in the future for the financial industry and the world economy. Its background and furthermore its impact on other
sectors of the financial markets and the broader financial industry when ultimately
spilling over to other economies causing a global recession, are in the focus.

2.1.

The Causes of the Subprime Credit Crisis

The reasons for this crisis are varied and complex. The crisis can be attributed to
a number of factors which emerged over several years and which were pervasive in
both, the housing and the credit markets. This includes the inability of homeowners
to make their mortgage payments, primarily due to risky mortgage products. Other
reasons were, e.g. overstrained lenders and speculation as well as overbuilding
during the boom period. High personal and corporate debt levels, financial products that distributed and concealed the risk of mortgage default also played a role.
Finally monetary policy, international trade imbalances and government regulation,
or the lack thereof, also fuelled the crisis.5 Further major catalysts of the subprime

4 Cf.|Federal Deposit Insurance Corporation, Failed Bank List, 2009.
(retrieved on 24 July 2009).
5 Cf.|J.E. Stiglitz, Commentary: How to prevent the next Wall Street crisis, 2008, />POLITICS/09/17/stiglitz.crisis/index.html (retrieved on 19 March 2009).

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| Bernd Sagemann & Peter Reese