The G-20 Communiqué: Relief for Eastern Europe
The Leaders' statement from the London summit of April 2 is an improvement over the usual communiqués from international meetings by being much more concrete, readable, and substantial. It provides clear policy principles and specifies its agenda in sufficient detail.
For Central and Eastern Europe, this statement is likely to be particularly important, because it commits sufficient financial resources to the International Monetary Fund (IMF) and other international financial institutions so that these institutions can provide Central and Eastern European countries with the necessary funding to stabilize their international finance.
Several direct consequences should result from the statement. First, the sheer availability of such a large amount of international emergency finance is likely to impede capital flight from countries in good financial shape. Even these countries, notably Poland and the Czech Republic, have suffered from capital outflows that have only been dictated by panic. That fear is now likely to calm down, after which capital outflows should recede.
Second, as a consequence of reduced or reversed capital outflows, the freely floating currencies throughout Central and Eastern Europe, which have fallen sharply, are likely to recover.
Third, the declared greater availability of public trade finance will most likely act as a catalyst and stimulate the supply of private trade finance as well. The export-dependent countries that have suffered the most, notably East Asia and Eastern Europe, are likely to recover faster thanks to returning exports.
Fourth, all these measures as well as direct bank restructuring and recapitalization are likely to greatly improve the situation of the banks in Central and Eastern Europe. When the currencies fall less or recover, their foreign indebtedness will be less troublesome, and their currency loans to their population and to companies will not so easily deteriorate into nonperforming loans.
Fifth, with the availability of the vast amount of new IMF funding, many more countries that may need an IMF program are likely to opt for one. The stigma of IMF programs, which is already very limited in the region, may further wither. The credible availability of such large funds is likely to help stabilize the whole region.
Sixth, the critical weak link in the whole European economy has been the European banks greatly exposed to loans to their subsidiaries in Eastern Europe. Now, the acute danger to these banks posed primarily by collapsing local currencies is likely to move to the past. This is a great achievement for the whole of Europe.
The overall consequence of the London summit for Central and Eastern Europe should thus be a more rapid return to financial stability and economic growth. Rarely has an international meeting appeared so important and successful immediately after its conclusion. If this analysis is correct, the instant market responses should be that relatively strong Eastern European currencies rise, that sovereign bond prices surge, and that stock markets soar.