In These New Times

The West in retreat, the pot running dry
CARL MORTISHED
carl.mortished@thetimes.co.uk Globeandmail
October 30, 2008
LONDON — We are witnessing another great retreat by the West. The International Monetary Fund is patching up the casualties in Central and Eastern Europe but the funds are running out and Gordon Brown, the British Prime Minister, is rushing to the Gulf to beg for funds. Turkey, our ally in the Near East, may also be in need of help and something must be done for Pakistan. A financial collapse on the front line of the war against the Taliban is not a risk worth contemplating.

There is something eerie about the lineup of financial chaos on Europe’s eastern borders. The chaotic withdrawal of funds by Western banks from the so-called “transition economies” of the former Warsaw Pact brings to mind Napoleon’s vanquished armies stumbling home on the road to Smolensk.

This is another imperial vision that has fallen foul of greed, corruption and incompetence. Hungary was close to becoming a fully fledged graduate in free-market capitalism. The European Bank for Reconstruction and Development had set a deadline of 2010 at which point Hungary would no longer qualify for the EBRD’s financial programs.

Perhaps Hungary and Ukraine were just too quick to embrace capitalist chic. The latter was Washington’s poster child, adored for its absurd flirtation with NATO but few bothered to consider whether a nation dependent on subsidized Russian fuel was independent and viable. Hungary is now consumed by debt, its gross external borrowings are almost equal to its GDP but economic growth has almost come to a standstill. Taxation is high and the black market is rife. Unable to finance growth with internal savings, Hungarians have borrowed abroad. Even ordinary citizens took out euro loans to finance house purchases, attracted by low euro interest rates.

Unsurprisingly, this high-risk gamble has gone badly wrong. Instead of converging with the euro zone, Hungary’s economy has rushed pell-mell in another direction; the collapse of the forint has left the nation with an unaffordable debt burden in euros, Swiss francs and yen. The government has lost all credibility to manage the situation after the Prime Minister admitted to lying about the state of the economy in order to win an election.

The World Bank has told Bulgaria to prepare an emergency financial plan and Romania’s Prime Minister has compared his nation to party-goers on the Titanic, oblivious to the water penetrating the lower decks. On Monday, Standard & Poor’s reduced the rating on Romania’s sovereign debt to “junk bond” status, and on Tuesday, Germany sounded the alarm on another front line in South Asia. Pakistan is suffering a balance of payments crisis and is badly in need of funds to meet its debt repayments.

The IMF’s pot will soon run dry. The emergency bailout fund stood at about $200-billion (U.S.) after the recent commitments of $2-billion to Iceland and $16.5-billion to Ukraine. Yesterday, the IMF pledged $15.7-billion to Hungary (the aid package also includes $8.1-billion from the European Union and $1.3-billion from the World Bank). Pakistan needs about $15-billion and there is a long queue quietly forming in the IMF’s corridors in Washington. Hence Gordon Brown’s mission to coax a bit of cash from the ample coffers in Beijing, Riyadh and Abu Dhabi.

The huge dollar reserves in the Gulf and in China could be recycled into banking bailouts on Europe’s eastern front and in other emerging economies that became addicted to debt in the recent decade.

The money will not come without strings. The new contributors to the fund will want more say in how the organization is run. The IMF used to be a club made up of Americans, Europeans and the Japanese but the dollar reserves are now in the petro-states and in China, and henceforth they will expect and get more clout in the management of the world economy.

Bankruptcy is always painful but it is more painful for nations than for individuals. When Argentina defaulted in 2001, it descended into an abyss of hyperinflation, mass unemployment and food shortages. A nation that exported food could not feed its children and as banks closed their doors, Argentines resorted to barter.

The British Prime Minister knows that we cannot afford to watch as a dozen Argentinas emerge on Europe’s border with Russia and across Asia. America is proving useless in this crisis, absorbed in its election campaign and pandering to its profligate and overindulged citizens.