KLAIPEDA - The bankruptcy of MF Global Holdings was a tell-tale signal to U.S. and international investors that it is even possible for U.S. financial institutions to fall victim to the eurozone debt crisis. While in the wake of the Greek debt crisis, many European financial institutions warn of a 2008-like economic contraction, or worse, the Lithuanian top echelon remains surprisingly calm, making many wonder whether the top policy-makers are too weary from the 2008 Lithuanian credit crunch and the government policies thereon.
“Lithuanian PM Andrius Kubilius does not yet ring distress bells, which he did in 2008, just because the situation still looks pretty good in the country. However, even with the situation due to the eurozone debt crisis uncertain, it is very unlikely he would take on a 2008-like austerity package now, with less than one year left till the parliamentary elections,” Aleksandr Izgorodin, Economic and Finance department analyst at Lithuania’s Industrialist Confederation, said to The Baltic Times.
He notes that the Finance Ministry’s 2012 GDP growth forecast of 4.7 percent might be “too optimistic,” however.
“That is why the finance minister has already reduced it by one percent. However, in light of the eurocrisis developments, the prognosis may be reviewed once again,” the analyst noted.
How can the Greek economic upheaval impact Lithuania? Where are the impact risks to be looked at? “Lithuania will not be ill-affected by it directly, as we have practically no trade with Greece. Indirectly, due to the eurozone difficulties, we already see investments halted, tighter borrowing policies and less consumption. Sure, it will impact us,” Izgorodin maintained.
Nordea Bank Lietuva economist Zygimantas Mauricas ponders that the Greek crisis’ shock waves can shake Lithuania in two ways – either through banks or export-oriented companies. “The bottom line is Greece will have to tighten its belt, therefore, the rest of the European Union will have to do the same, as the economy is too complex and intertwined,” he maintains.
With the Greek belt being tightened, he says, Greeks will consume fewer products and services, therefore, Greek export companies will have to eventually scale down their exports. With Italy and Germany, two Greek-bound export leaders, decreasing their export volumes, the Nordea Bank Lietuva economist says domestic consumption in the countries will consequently shrink.
“Therefore, the chain of the shrinkage due to it will inevitably reach Lithuania as well. Our exporters and export production-oriented producers would be harmed most. However, the domestic market would keep moving slowly forward out of inertia,” Mauricas predicts. He warns that the second aftermath of the Greek crisis – rising mistrust with Greece-related financial institutions – can be much more damaging.
“With Greece’s inability to pay back its creditors and a looming default, trust in Greece itself, as well as the Greece-related financial institutions that have lent millions and billions to the debt-stricken country, is decreasing. In that sense, French and Spanish banks are being hit the most. This mistrust would wriggle all the way to German and Scandinavian banks. The latter would cause direct pain to Lithuania, as our banks are owned by Scandinavians,” the economist noted.
He emphasizes that bank trust is on the decline again, and the Scandinavian banks are not an exception. “The Swedish banks today borrow at bigger rates on the international markets than a half year ago,” the bank representative notes. “It is the aftermath of the increasing bank mistrust globally. With it deepening, banks’ lack of financing [mean], naturally, [they] cannot lend to enterprises and individuals. We had a similar plight in 2008,” Mauricas observes.
He predicts that the situation will remain the same until June 2012 at least, when, following the eurozone leaders’ agreement, eurozone banks will have to increase their capital levels. It is estimated the banks will need to find an extra 150 billion euros. “Large bank losses and the demand to strengthen bank capital will additionally put constraints on bank loans. Sure, they will become more expensive,” Tomas Andrejauskas, head of Swedbank Markets in Lithuania, said to Ekonomika. He added: “It will be just another blow to investment, consumption and the economy.”
The analyst agrees that Europe will have to go on tightening its financial and budgetary belts, while serious legislation decentralizing the EU budget and reinforcing fiscal discipline will have to be made and moved into national legislation. The further saving efforts, he says, will have a negative impact on European competitiveness and, he stresses, one of two evils will have to be chosen to restore it – either significantly reduce workforce costs, or make the euro cheaper. “The first option would negatively influence consumption, while the other would mean letting euro printing machines churn free. It, consequently, would lead to an unstable price level, and the new euros would be used to decrease the mounting debts, but not boost consumption,” Andrejauskas maintains.
He is convinced that the entire Europe will have to deal with a second dip of recession in the next 2 or 3 years. “Obviously, we would not avoid the ill-affects, as 60 percent of our export goods go to Europe. Besides, our national currency is pegged to the euro. Essentially, we all will have to look for the 2008 savings’ tunes – the state will consider new austerity measures, while the financial sector will scale down its lending volume due to the significantly increased capital costs. I do not disregard the possibility that we will have to search for new export markets. Maybe in the Far East, which holds the future for exporters,” the Swedbank Markets head in Lithuania said.
Some other financial analysts, however, tend to stick with less dramatic development scenarios.
“The Lithuanian export structure is rather diversified, and our export markets seem to be relatively quite well off. Russia, for example, is not essentially linked with fundamental ties to the United States or with the eurozone. Germany will likely continue to look the best. Speaking of Poland and Estonia, two other important export markets, their economic growth will likely remain higher than the eurozone average,” Violeta Klyviene, Danske Bank senior analyst says.
Klyviene warns, however, that although Lithuania is not “totally dependent” on the dismal news from Western Europe, “we can already feel” the so-called impact of the “infection” with the angst over the future settling onto our entrepreneurs and residents.
Gintaras Rutkauskas, board member of the Finance Analyst Association, says that the currency market reacts to the eurozone crisis very sensitively. “The dollar and euro fluctuations of 2.5-15 percent is just abnormal. Whether it will reach some stability depends on the political decisions, which may determine whether the EU will save Greece, and whether the debt crisis will affect Spain and Italy,” he says.
“A weakening euro makes Lithuanian exports more competitive, and stronger dollars can eventually hike up fuel prices, as we buy oil in dollar-oriented Russia,” Izgorodin said to The Baltic Times.