Central and Eastern Europe: Structural Current Account Deficits and Increasing Foreign Debts (IV)
Persistant current account deficits and increasing foreign debts are alarming though hardly discussed trends of East Central Europe's economic development. Part IV: External Debt.
Rainer Tomassovits and Joachim Becker - Oct. 16, 2006
The External Debt Statistics have been reporting a steady increase of external debt over the past decade in all the countries under investigation. In Poland, Hungary and Latvia a sharp increase can be observed from 2002 on until today. Since 2004 the other countries in the region have joined this trend. The percentage increases have been considerably higher than in the debt-prone Latin American economies of the 1990s. They range from a 170.2% increase for the years 1995-2005 in Poland to increases of several hundred per cent in the case of the Baltic states (Lithuania: + 378,6% for 1996-2005, Estonia: + 697.2% for 1996-2005, Latvia: + 1558,2% for 1995-2005).
These relative increases are similar to those of the countries of the Latin American Cono Sur in the 1970s and early 1980s. In all these countries, the combination of overvalued national currencies, high current account deficits and rapidly increasing foreign debts resulted in severe financial crises.
Foreign debt is increasingly of a private nature. The Government as a debtor is relevant for the long-term debt.
The overall development is also typical for Poland. Most of the external debt in Poland is long-term, but the short-term debt has increased more rapidly than the long-term debt. The ratio between short-term debt and total external debt has been about 7% in 1995 and 20% in 2005. Total gross external debt has increased from 41 bn € in 1995 to 110.7 bn € in 2005.
The Czech Republic shows a similar picture. Short-term debt is about a quarter of total debt, only between 2000 and 2003 it was close to 50%. In comparison with Poland, public debt appears less relevant with only 20% of external debt accruing to the government-sector. Total gross external debt has increased from 13.6 bn € in 1995 to 38.8 bn € in 2005. In Slovakia the gross external debt grew from 4.5 bn € in 1995 to 22.9 bn € in 2005 which implies a more rapid rise than in the Czech Republic. Slovakia's ratio of gross external debt/GDP reached 60% in 2005 whereas the Czech ration reached 39% only.
Hungary has had a longer experience with Direct Investment/Intercompany Lending which has been a significant factor since 1995 and is still important today. Most of the external debt is long-term with a more or less constant ratio of short-term to long-term external debt. Hungary’s external debt has increased from 24.5 bn € in 1995 to 66.3 bn € in 2005 and is also very high in relation to the GDP. In 2005 this percentage rate was about 75%.
In Slovenia the gross external debt is similar to that of Hungary, it has increased from 4.3 bn € in 1995 to 19.6 bn € in 2005. The percentage rate related to GDP jumped over the 70% mark in 2005.
The Baltic states experienced an explosion of their external debt. In Estonia it has increased from 1.3 bn € in 1996 to 9.5 bn € in 2005. In Latvia the gross external debt was 1.2 bn € in 1995 and 18.2 bn € in 2005. In Lithuania it has increased from 1.9 bn € in 1996 to 10.5 bn € in 2005. In Latvia the gross external debt surpasses GDP – it was 143.3% of GDP in 2005. In Estonia the foreign debt reached 86.2% of GDP in 2005 which is a rather horrendous figure.
In the Baltic countries the dependence of short-term debt is much higher than in the other Central East European countries. Above all the short-term gross external debt in Latvia has been traditionally higher than the long-term one. Thus the Baltic states exhibit the alarming feature of an extremely rapidly increasing foreign debt which, in addition, is rather short-term. The external vulnerability of the Baltic states is extremely high.
The relation foreign debt/GDP might indicate future problems of repayments if the figure displays high amounts. In the case of Lativa, the relation foreign debt/GDP was already 143,3% in 2005 which seems to indicate an unbearable burden for the future. Likewise the figure of Estonia – 86,2% - is extremely worrying. Only in the cases of Poland and the Czech Republic, the relation external debt/GDP is below 50%: 38.8% in the Czech Republic and 45.5% in Poland.
At least some of the Central East European states ran into troubles regarding their foreign exchange earnings. They might face a situation where they won't be able to service there foreign debt obligations. Most Central East European countries do show worse data than Latin American countries of the late 1990s in regard of the gross external debt/GDP-ration with (Ugarteche 2001: 75 ss.). In Argentina this figure had been 52.2% in the crisis year 2001 (Cepal 2004: 134, tab. 1), in Brazil 45.0% in the crisis year 1999 (ibid.: 152, tab. 1). At the moment, these thresholds are surpassed by most of the East European countries. It is only the Czech Republic that is considerably below this ratio.
In the Baltic states, domestic credits were actually lower than gross external debt. A similar though less pronounced tendency one can observe in Hungary. In Poland the two levels were more or less equal. Only in the Czech Republic and in Slovakia, domestic credit was significantly higher than gross external debt. A high ratio of external debt in relationship to domestic credit indicates an advanced informal Euroization of the economy. This implies a high degree of vulnerability of the payment chains in case of a strong devaluation of the national currency. This would occur if investors and creditors lost confidence in the creditor state. Debtors who earn a national currency but are indebted in Euros would face a revaluation of their debt and severe payment problems. Therefore informal Euroization is another element of external vulnerability.
These relative increases are similar to those of the countries of the Latin American Cono Sur in the 1970s and early 1980s. In all these countries, the combination of overvalued national currencies, high current account deficits and rapidly increasing foreign debts resulted in severe financial crises.
Foreign debt is increasingly of a private nature. The Government as a debtor is relevant for the long-term debt.
The overall development is also typical for Poland. Most of the external debt in Poland is long-term, but the short-term debt has increased more rapidly than the long-term debt. The ratio between short-term debt and total external debt has been about 7% in 1995 and 20% in 2005. Total gross external debt has increased from 41 bn € in 1995 to 110.7 bn € in 2005.
The Czech Republic shows a similar picture. Short-term debt is about a quarter of total debt, only between 2000 and 2003 it was close to 50%. In comparison with Poland, public debt appears less relevant with only 20% of external debt accruing to the government-sector. Total gross external debt has increased from 13.6 bn € in 1995 to 38.8 bn € in 2005. In Slovakia the gross external debt grew from 4.5 bn € in 1995 to 22.9 bn € in 2005 which implies a more rapid rise than in the Czech Republic. Slovakia's ratio of gross external debt/GDP reached 60% in 2005 whereas the Czech ration reached 39% only.
Hungary has had a longer experience with Direct Investment/Intercompany Lending which has been a significant factor since 1995 and is still important today. Most of the external debt is long-term with a more or less constant ratio of short-term to long-term external debt. Hungary’s external debt has increased from 24.5 bn € in 1995 to 66.3 bn € in 2005 and is also very high in relation to the GDP. In 2005 this percentage rate was about 75%.
In Slovenia the gross external debt is similar to that of Hungary, it has increased from 4.3 bn € in 1995 to 19.6 bn € in 2005. The percentage rate related to GDP jumped over the 70% mark in 2005.
The Baltic states experienced an explosion of their external debt. In Estonia it has increased from 1.3 bn € in 1996 to 9.5 bn € in 2005. In Latvia the gross external debt was 1.2 bn € in 1995 and 18.2 bn € in 2005. In Lithuania it has increased from 1.9 bn € in 1996 to 10.5 bn € in 2005. In Latvia the gross external debt surpasses GDP – it was 143.3% of GDP in 2005. In Estonia the foreign debt reached 86.2% of GDP in 2005 which is a rather horrendous figure.
In the Baltic countries the dependence of short-term debt is much higher than in the other Central East European countries. Above all the short-term gross external debt in Latvia has been traditionally higher than the long-term one. Thus the Baltic states exhibit the alarming feature of an extremely rapidly increasing foreign debt which, in addition, is rather short-term. The external vulnerability of the Baltic states is extremely high.
The relation foreign debt/GDP might indicate future problems of repayments if the figure displays high amounts. In the case of Lativa, the relation foreign debt/GDP was already 143,3% in 2005 which seems to indicate an unbearable burden for the future. Likewise the figure of Estonia – 86,2% - is extremely worrying. Only in the cases of Poland and the Czech Republic, the relation external debt/GDP is below 50%: 38.8% in the Czech Republic and 45.5% in Poland.
At least some of the Central East European states ran into troubles regarding their foreign exchange earnings. They might face a situation where they won't be able to service there foreign debt obligations. Most Central East European countries do show worse data than Latin American countries of the late 1990s in regard of the gross external debt/GDP-ration with (Ugarteche 2001: 75 ss.). In Argentina this figure had been 52.2% in the crisis year 2001 (Cepal 2004: 134, tab. 1), in Brazil 45.0% in the crisis year 1999 (ibid.: 152, tab. 1). At the moment, these thresholds are surpassed by most of the East European countries. It is only the Czech Republic that is considerably below this ratio.
High External – Low Domestic Debt
Another worrisome feature is the relationship between external and internal debt. Domestic debt seems rather low in the respective countries. In relationship to GDP, it reached only less than a third of the ratio the Euro-Zone displayed at the beginning of this decade (Hölscher/Stefan 2006: 192, Tab. 1).In the Baltic states, domestic credits were actually lower than gross external debt. A similar though less pronounced tendency one can observe in Hungary. In Poland the two levels were more or less equal. Only in the Czech Republic and in Slovakia, domestic credit was significantly higher than gross external debt. A high ratio of external debt in relationship to domestic credit indicates an advanced informal Euroization of the economy. This implies a high degree of vulnerability of the payment chains in case of a strong devaluation of the national currency. This would occur if investors and creditors lost confidence in the creditor state. Debtors who earn a national currency but are indebted in Euros would face a revaluation of their debt and severe payment problems. Therefore informal Euroization is another element of external vulnerability.
Read in part V: Conclusion and Sources
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