Czechs tighten the belt - prosperity pre-crisis not to return

After Hungarians radical reforms, Czechs reduce spending and increase taxes (The Czech lower house of parliament approved a $4 billion package of tax hikes and spending cuts on Friday). Mojmir Hampl, Deputy Governor of Czech Central Bank said it is sign of responsibility. Hampl says that Czech economy will encounter another recession in 2010.

Speaking at the Reuters Central and Eastern Europe Investment Summit in Vienna, Hampl said the Czech recovery would likely have the shape of an asymmetric "W," with a second low point, less deep than the first one, around mid-2010.

Hampl also welcomed a package of tax hikes and spending cuts approved by the Czech parliament on Friday, saying it was a sign of responsibility and a proper response to the country's fast-growing fiscal gap despite a poor growth outlook.

The bank, which has cut 250 basis points off interest rates to aid growth in the last year, left borrowing costs at an all-time low at a meeting last week, but said inflation risks have shifted slightly lower.


The Czech Republic saw gross domestic product fall 5.5 percent year-on-year in the second quarter, but eked out a 0.1 percent rise compared to the previous three months.

"We will see the first positive signs in the first half of 2010, then something like another dip and then the economy will eventually start growing," Hampl said. "This is our baseline."

The recovery would lead to lower growth rates than the up to the nearly 7-percent rises the Czechs had seen in past years.

"My suspicion is that if the economies do return to growth, the potential will be lower than prior to the crisis," he said.

"We will not return to excessive growth this prediction holds at least for the whole European Union. But for our prediction (for the Czech Republic) currently we can't see any good reason why we should see the potential growing as fast as before the crisis."

Economists have cast doubt on future growth rates given the need to tackle high levels of debt in both the public and private sphere and likely tighter lending conditions and controls.

Eastern Europe bad debt can prolong crisis

IMF announcement about success of its policies towards Eastern Europe EBRD warned that that part of Europe bad debt is underestimated.

European Commission's demand that Western banks get rid of non-core assets could prompt these lenders to sell off Eastern and Central European subsidiaries and further tighten credit to the region. (...)

Persistently weak credit growth and uncertainty over the banking system make the pace of economic recovery uneven and could hold the region back in the coming years (...)

For many countries we see continued deterioration. The diversity within the region is important to keep in mind...Even for countries that have turned the corner we look forward to slow and fragile growth

Polish Central Bank warned in its newly published report that Poland can exceed the level of internal debt at 7 percent of GDP as early as 2010.

Here are my notes from that very interesting discussion on the need

of regulation in financial sector.

Lawrence K. Fish (CEO)

I. How devastating that crisis was?

3 of 5 the biggest investment banks failed

the country’s residential mortgage lender failed

the country’s of largest commercial banks failed

largest insurance company failed

massive governmental mortgage assemblies Fanie and Freddie

2 of the largest UK banks failed

largest bank in Belgium failed

largest bank in Holland failed

tens of billions of dollars were lost by banks in Switzerland, Germany, China, Russia

95 US banks out of 2800 ceased to exist

Sins of financial sector

- too much leverage

- too complex products

- too little transparency and risk management

- too little involvement of Board of Directors

II. What is that you haven’t read about this?

- Not every countries banking system got it wrong, most notably Canada, Brazil, and Australia. Why they did not have consequences of that economic collapse?

* regulations

It was unusual that it was consumer crisis. Because it was always that consumer lending was the place that everyone wanted to be, place that was easy to underwrite and where never would be problems.

Real key, central risk in banking is liquidity.

Most banks in USA did fine.

Banks are heavily regulated institutions. Who isn’t regulated? Hedge funds, private equity firms, pay-day lenders, remittance companies (Western Union), investment banks were lightly regulated, mortgage companies (regulated by states but no standards for them exist)

III. What’s gonna happen now?

It’s not clear whether we will be able to fix it so it would not happen again.

IV. It’s matter of ethics in business

Prof. Simon Johnson

I. Is greed good?

II. Issue of capital for banks – how much capital is enough?

III. How not to over regulate. Dangers: lost of competitiveness, unavailability of credit to consumers