The owner of some of the Czech capital’s chic restaurants unveiled a novel approach this week to lure business clients to one of his upscale dining rooms: let diners pay what they like.
The owner, Sanjiv Suri, hopes executives will not want to appear cheap to their guests when presented with a blank check after dining at the lunch buffet, laden with grilled vegetables instead of foie gras. Even if they pay nothing, he added, they will almost certainly return as paying customers.
“During an economic crisis you need to be creative,” said Mr. Suri, sipping pinot noir in a half-empty dining room.
Breaching the old adage that there is “no such thing as a free lunch” is just the latest tell-tale sign that the financial crisis has reached the Danube, even in a relatively resilient economy like the Czech Republic’s. As exports to Western Europe — its biggest market — begin to falter, companies are scaling back. Unemployment is starting to rise, hitting 6.8 percent last month, versus 6 percent a year earlier. The country’s gross domestic product is expected to contract by about 0.3 percent in 2009, the Czech National Bank said this week, after growing about 4 percent in 2008.
How bad it gets remains to be seen. Czech optimists say that they should fare better than countries to the east, which are far more dependent on loans from Western banks and have less developed economies. Indeed, the crisis threatens to widen the economic divide within Eastern Europe, as richer, well-run countries like the Czech Republic better withstand the downturn, leaving weaker peers further behind.
“The disaster spotlight is now being pointed at east and central Europe,” said Gernot Mittendorfer, the Austrian chief executive of Ceska Sporitelna, a large Czech bank owned by the Erste Group of Austria.
“But panicked investors are wrongly lumping all of the countries in this region together, and the reality is that there is not widespread rot.”
The most vulnerable are the newer states. Moody’s Investors Service warned in a report last week that western owners of East European banks are coming under pressure to withdraw capital from countries already reeling from budget deficits and foreign borrowing. The countries most at risk, the report said, are the Balkan countries, Hungary, Croatia and Romania.
While Asian economies recovered fairly quickly from the 1990s financial crisis by exporting their way out of recession, the export outlook does not look promising. Demand for goods is plummeting almost everywhere in the world.
Here in the Czech Republic, the problem hit home last week after foreign guest workers, who filled manufacturing jobs during the boom years, were offered free airline tickets and a 500-euro allowance to go home.
Few economists expect the region to avoid the recession rippling around the world. Nonetheless, Mr. Mittendorfer said, panic is not justified. The financial perils in places like Ukraine, he said, are not inextricably linked with wealthier, better-managed economies like the Czech Republic, Slovakia or Poland, which are already in the European Union.
Indeed, while emerging European markets need to repay more than $400 billion in short-term debt this year, a recent UBS report noted that more than half this debt was held by relatively resilient economies like the Czech Republic.
Much of the alarm over Eastern Europe has been focused on Austrian banks like Erste, Raiffeisen and Bank Austria, which came to the region after communism fell, eager to profit from the heady appetite for consumption and credit. Today, Austria’s loans to the east amount to 70 percent of its gross domestic product. Though many Eastern European subsidiaries could scarcely survive without their parent banks, Austrian bankers and financial analysts said they are confident the banks can provide it.
Andreas Treichl, chief executive of the Erste Group, one of Austria’s top three banks, said in a telephone interview that Erste had no intention of retrenching. He said the bank remained profitable and had adequate capital to cover its foreign exchange risk, even in volatile countries like Romania. “We will definitely not retreat,” he said.
Mr. Treichl pointed out that while many in the West were experiencing profound economic crisis for the first time in their lives, Eastern Europeans are more resilient, having lived through communism, dictatorship and 300 percent inflation. “People in this region are 10 times better equipped to cope with a crisis than spoiled investment bankers in New York,” he said.
Even if they are not and the trouble spots implode, economists and analysts here said they were confident that the European Union, the world’s biggest trading bloc, would find a way to come to the rescue rather than allow financial chaos to spread across the Continent.
Manufacturers are planning for the long haul.
Radek Spicar, a spokesman for Skoda, the Czech automobile maker, said the company had suffered a steep decline in orders from Western Europe, in particular Germany. Skoda has reduced its temporary workers to 800, from 4,000, and has shortened its work week to four days, from five. So far, it has not dismissed any of its 25,000 full-time workers
Germany’s stimulus package includes an offer of 2,500 euros to every person who scraps a car nine years or older and buys a new one, and that is bringing more Germans to Skoda showrooms, Mr. Spicar said. The Czech government is designing its own stimulus package as well.
The biggest casualty of the crisis in Eastern Europe could be unfettered capitalism, ardently embraced by countries that came out of communism. Thousands of people have taken to the streets in Poland, Latvia, Bulgaria and elsewhere, angry that their social safety net is tattered. In the Czech Republic, there was palpable resentment this week that Czechs were being punished for economic transgressions committed elsewhere.
Tomas Sedlacek, who served as an economic adviser to former President Vaclav Havel, noted that in the 1990s, the West lectured the former Eastern bloc about the need to privatize and deregulate. Now, the message emanating from Washington is to nationalize and to regulate.
“This crisis has turned the world upside down,” he said. “People here who argue that open markets are the solution to everything are no longer being taken as seriously.”
Monday, February 23, 2009
Tuesday, February 17, 2009
Currency Issues Weigh on Eastern Europe
A new dividing line is settling across central Europe with economic repercussions that are already painful and could potentially be disastrous.
Rather than being based on ideology, the division this time is based on countries that use the euro and those that do not.
Only two out of 10 of the newest Eastern European members of the European Union, Slovakia and Slovenia, are members of the 16-nation euro zone. And the other eight countries are desperate for help as their companies and economies are buffeted by currency fluctuations and declines.
The European Central Bank, which oversees the euro, puts money into the system by lending against collateral, and since the beginning of the current economic crisis, this practice has expanded vastly.
While euro zone members have priority, such lending also has become broader. British banks have benefited through their euro zone subsidiaries, and the central bank has even provided loans to central banks in Poland and Hungary.
What the central bank has not done for the new members yet to adopt the euro is to provide temporary currency swaps — along the lines of what the Federal Reserve did for Brazil, Mexico, Singapore and South Korea last October to enable those countries to convert their currencies more easily to dollars.
And the central bank does not accept as collateral the bonds issued in zlotys, forints or the other local currencies in Eastern Europe.
“This has made it unattractive for euro-area financial institutions to hold noneuro government bonds, thus contributing to their sell-off,” said Zsolt Darvas, a visiting fellow at Breugel, an independent economics research group in Brussels.
The global financial crisis was slow to reach this part of Europe because its banks had few troubled assets. But when the collapse of Lehman Brothers last September sent new shock waves through the global banking system, Eastern Europe and other emerging markets were no longer spared.
Hungary and Latvia were particularly vulnerable; Hungary because of its deep exposure to foreign lending, and Latvia because of its shaky banking system and overextended consumers. When foreign currency financing dried up, the domestic interbank money markets stumbled and currencies came under pressure. Both countries were rescued by the International Monetary Fund and the European Union, with a heavy price attached in the form of government spending cuts.
Political and psychological factors also make attracting funds more difficult outside the euro zone, said Vasily Astrov, an economist at the Vienna Institute for International Economic Studies.
“Investors have become risk averse, at least with regard to financial markets,” he said. “They are opting for countries which hold the major currencies.”
The extraordinary pace with which currencies have declined has only aggravated such problems. In Poland, the zloty has fallen in value by 50 percent against the euro.
In theory, that should help exporters. But Aleksander Drzewiecki, chairman of the House of Skills, a consulting company, said many export-driven companies depend on imports in the first place. “The turbulence with the exchange rate is horrible,” he said. “We have no idea where we stand.”
Poland, with almost 40 million people, is the biggest of the new member states. It lost an opportunity right after joining to quickly prepare to adopt the euro. The nationalist-conservative government then, led by Lech Kaczynski, was intensely skeptical toward the euro and resistant to abandoning the zloty.
The new center-right government, led by Donald Tusk, which took office in late 2007, is more “euro friendly,” Mr. Astrov said. But its target entry date of 2012 is now called into question by the economic turmoil.
Elsewhere in Eastern Europe, the Czech Republic is keeping its options about joining the euro zone open, although it would need support from President Vaclav Klaus, a euro skeptic.
The Baltic states would like to join as quickly as possible, but their economies are contracting so much that it would be impossible to meet the criteria, which, among other things, stipulates that budget deficits should be below 3 percent of gross domestic product.
Without its subsidiary in Germany, things could be a lot worse for Ergis-Eurofilms, the biggest manufacturer of plastic films and laminates in Poland, which last year had revenue of 150 million euros ($189 million at current exchange rates) and a profit of about 10 million euros.
By contrast, Fiam, a family-owned company in Slovakia that specializes in recycling plastic materials, has its subsidiaries outside the euro zone, in Hungary, Poland and the Czech Republic. As a result, Fiam has been protected from currency fluctuations in its home market, which has adopted the euro, but faces havoc when selling eastward.
“Leaving aside the fact that many economies are all in recession, there is predictability inside the euro zone because there are no currency fluctuations,” said Ivan Saro, the company’s chief financial officer, whose father started the business in 1988.
Andreas Tostmann, chairman of the board of Volkswagen’s subsidiary Skoda in Slovakia, said the elimination of exchange rates meant “higher stability in planning and not least, the simplification of transactions inside the VW Group.”
But VW, similar to Fiam, has markets outside the euro zone area, where its products become more expensive. “It is a nightmare,” Mr. Saro said.
The fluctuations have motivated the company to try to sell more to the euro zone area.
But Mr. Saro is still facing problems with tight credit. The banks, he said, are stricter in granting loans and customers are paying late.
“We get paid but we don’t know when,” he said. “The point is that having adopted the euro, it is some kind of guarantee. But don’t ask me to look beyond the short term. These times are just too crazy.”
Rather than being based on ideology, the division this time is based on countries that use the euro and those that do not.
Only two out of 10 of the newest Eastern European members of the European Union, Slovakia and Slovenia, are members of the 16-nation euro zone. And the other eight countries are desperate for help as their companies and economies are buffeted by currency fluctuations and declines.
The European Central Bank, which oversees the euro, puts money into the system by lending against collateral, and since the beginning of the current economic crisis, this practice has expanded vastly.
While euro zone members have priority, such lending also has become broader. British banks have benefited through their euro zone subsidiaries, and the central bank has even provided loans to central banks in Poland and Hungary.
What the central bank has not done for the new members yet to adopt the euro is to provide temporary currency swaps — along the lines of what the Federal Reserve did for Brazil, Mexico, Singapore and South Korea last October to enable those countries to convert their currencies more easily to dollars.
And the central bank does not accept as collateral the bonds issued in zlotys, forints or the other local currencies in Eastern Europe.
“This has made it unattractive for euro-area financial institutions to hold noneuro government bonds, thus contributing to their sell-off,” said Zsolt Darvas, a visiting fellow at Breugel, an independent economics research group in Brussels.
The global financial crisis was slow to reach this part of Europe because its banks had few troubled assets. But when the collapse of Lehman Brothers last September sent new shock waves through the global banking system, Eastern Europe and other emerging markets were no longer spared.
Hungary and Latvia were particularly vulnerable; Hungary because of its deep exposure to foreign lending, and Latvia because of its shaky banking system and overextended consumers. When foreign currency financing dried up, the domestic interbank money markets stumbled and currencies came under pressure. Both countries were rescued by the International Monetary Fund and the European Union, with a heavy price attached in the form of government spending cuts.
Political and psychological factors also make attracting funds more difficult outside the euro zone, said Vasily Astrov, an economist at the Vienna Institute for International Economic Studies.
“Investors have become risk averse, at least with regard to financial markets,” he said. “They are opting for countries which hold the major currencies.”
The extraordinary pace with which currencies have declined has only aggravated such problems. In Poland, the zloty has fallen in value by 50 percent against the euro.
In theory, that should help exporters. But Aleksander Drzewiecki, chairman of the House of Skills, a consulting company, said many export-driven companies depend on imports in the first place. “The turbulence with the exchange rate is horrible,” he said. “We have no idea where we stand.”
Poland, with almost 40 million people, is the biggest of the new member states. It lost an opportunity right after joining to quickly prepare to adopt the euro. The nationalist-conservative government then, led by Lech Kaczynski, was intensely skeptical toward the euro and resistant to abandoning the zloty.
The new center-right government, led by Donald Tusk, which took office in late 2007, is more “euro friendly,” Mr. Astrov said. But its target entry date of 2012 is now called into question by the economic turmoil.
Elsewhere in Eastern Europe, the Czech Republic is keeping its options about joining the euro zone open, although it would need support from President Vaclav Klaus, a euro skeptic.
The Baltic states would like to join as quickly as possible, but their economies are contracting so much that it would be impossible to meet the criteria, which, among other things, stipulates that budget deficits should be below 3 percent of gross domestic product.
Without its subsidiary in Germany, things could be a lot worse for Ergis-Eurofilms, the biggest manufacturer of plastic films and laminates in Poland, which last year had revenue of 150 million euros ($189 million at current exchange rates) and a profit of about 10 million euros.
By contrast, Fiam, a family-owned company in Slovakia that specializes in recycling plastic materials, has its subsidiaries outside the euro zone, in Hungary, Poland and the Czech Republic. As a result, Fiam has been protected from currency fluctuations in its home market, which has adopted the euro, but faces havoc when selling eastward.
“Leaving aside the fact that many economies are all in recession, there is predictability inside the euro zone because there are no currency fluctuations,” said Ivan Saro, the company’s chief financial officer, whose father started the business in 1988.
Andreas Tostmann, chairman of the board of Volkswagen’s subsidiary Skoda in Slovakia, said the elimination of exchange rates meant “higher stability in planning and not least, the simplification of transactions inside the VW Group.”
But VW, similar to Fiam, has markets outside the euro zone area, where its products become more expensive. “It is a nightmare,” Mr. Saro said.
The fluctuations have motivated the company to try to sell more to the euro zone area.
But Mr. Saro is still facing problems with tight credit. The banks, he said, are stricter in granting loans and customers are paying late.
“We get paid but we don’t know when,” he said. “The point is that having adopted the euro, it is some kind of guarantee. But don’t ask me to look beyond the short term. These times are just too crazy.”
Thursday, February 12, 2009
U.S. Offers Europe Goodwill, and Expects Something in Return
President Obama’s national security team went to Munich last weekend to unveil the new administration’s approach to America’s relations with the rest of the world.
There was a lot of nice talk about how things are going to be different, and how the United States will consult with Europe on everything from Afghanistan to climate change to Iran. Vice President Joseph R. Biden Jr. drew applause from the audience of mostly European leaders and security officials as soon as he walked on stage, and he promised a “strong partnerships to meet common challenges.”
“I come to Europe on behalf of a new administration determined to set a new tone in Washington, and in America’s relations around the world,” Mr. Biden said.
European officials, many of whom had been critical of the Bush administration in the past for what they characterized as President Bush’s go-it-alone policy, were fulsome in their praise of the new administration. But along with all of the goodwill and bonhomie, there was some trepidation.
“There’s a little of a feeling of ‘be careful what you wish for,’ ” one European diplomat told me that Saturday night in Munich after Mr. Biden’s speech.
No kidding. The Obama administration has made clear that it is going to be making a lot of demands on Europe. Administration officials have dubbed it their “more for more” strategy, and it basically boils down to this: In return for making nice on climate change, reaching out to Iran, shutting down the military prisons at Guantanamo, pledging not to torture, and sundry other things which the Bush administration wouldn’t do, the Obama administration will expect Europe to give things to the United States that it denied Mr. Bush.
During an interview at his hotel after his speech, Mr. Biden elaborated on “more for more.”
“We are going to do more,” he said, “and we should do more. But we are going to expect a lot more too.”
The list is long, and it starts in Afghanistan, where Mr. Obama pledged during his campaign to send at least two additional brigades to launch a concerted and re-focused fight against the insurgency there, particularly in the lawless areas of the country in the south and the east. In return, Mr. Obama, who is scheduled to make his first presidential trip to Europe for a NATO summit in April, is expected to ask European allies for more troops and more development aid.
European governments have already been ahead of popular opinion when it has come to sending additional troops to Afghanistan, and they have been loathe to take on an additional load.
Both German Chancellor Angela Merkel and French President Nicolas Sarkozy, both of whom were at the Munich conference and listened to Mr. Biden’s speech, skirted the issue of whether they would send troops to Afghanistan.
NATO Secretary General Jaap De Hoop Scheffer warned Europe against marginalizing itself on Afghanistan. “The Obama administration has already done a lot of what Europeans have asked for, including announcing the closure of Guantanamo and a serious focus on climate change,” Mr. De Hoop Scheffer told the conclave. “Europe should listen; When the United States asks for a serious partner, it does not just want advice, it wants and deserves someone to share the heavy lifting.”
The Obama administration will also be asking for more from Europe on Iran. While Mr. Obama repeated on Monday during his press conference that his administration will reach out to Iran for direct talks, administration officials also say that they plan to strike a tough line in negotiations over Iran’s enrichment of uranium, which the West has charged is aimed towards a nuclear bomb, a charge Iran denies.
Administration officials say that they want to get Europe — and Russia and China — to ramp up the sanctions against Iran if Tehran refuses to stop its enrichment of uranium.
The Obama administration will also be asking European governments to step up to take some of the Guantanamo prisoners off of America’s hands.
“Our security is shared,” Mr. Biden told the group in Munich. “So, too, is our responsibility to defend it.”
There was a lot of nice talk about how things are going to be different, and how the United States will consult with Europe on everything from Afghanistan to climate change to Iran. Vice President Joseph R. Biden Jr. drew applause from the audience of mostly European leaders and security officials as soon as he walked on stage, and he promised a “strong partnerships to meet common challenges.”
“I come to Europe on behalf of a new administration determined to set a new tone in Washington, and in America’s relations around the world,” Mr. Biden said.
European officials, many of whom had been critical of the Bush administration in the past for what they characterized as President Bush’s go-it-alone policy, were fulsome in their praise of the new administration. But along with all of the goodwill and bonhomie, there was some trepidation.
“There’s a little of a feeling of ‘be careful what you wish for,’ ” one European diplomat told me that Saturday night in Munich after Mr. Biden’s speech.
No kidding. The Obama administration has made clear that it is going to be making a lot of demands on Europe. Administration officials have dubbed it their “more for more” strategy, and it basically boils down to this: In return for making nice on climate change, reaching out to Iran, shutting down the military prisons at Guantanamo, pledging not to torture, and sundry other things which the Bush administration wouldn’t do, the Obama administration will expect Europe to give things to the United States that it denied Mr. Bush.
During an interview at his hotel after his speech, Mr. Biden elaborated on “more for more.”
“We are going to do more,” he said, “and we should do more. But we are going to expect a lot more too.”
The list is long, and it starts in Afghanistan, where Mr. Obama pledged during his campaign to send at least two additional brigades to launch a concerted and re-focused fight against the insurgency there, particularly in the lawless areas of the country in the south and the east. In return, Mr. Obama, who is scheduled to make his first presidential trip to Europe for a NATO summit in April, is expected to ask European allies for more troops and more development aid.
European governments have already been ahead of popular opinion when it has come to sending additional troops to Afghanistan, and they have been loathe to take on an additional load.
Both German Chancellor Angela Merkel and French President Nicolas Sarkozy, both of whom were at the Munich conference and listened to Mr. Biden’s speech, skirted the issue of whether they would send troops to Afghanistan.
NATO Secretary General Jaap De Hoop Scheffer warned Europe against marginalizing itself on Afghanistan. “The Obama administration has already done a lot of what Europeans have asked for, including announcing the closure of Guantanamo and a serious focus on climate change,” Mr. De Hoop Scheffer told the conclave. “Europe should listen; When the United States asks for a serious partner, it does not just want advice, it wants and deserves someone to share the heavy lifting.”
The Obama administration will also be asking for more from Europe on Iran. While Mr. Obama repeated on Monday during his press conference that his administration will reach out to Iran for direct talks, administration officials also say that they plan to strike a tough line in negotiations over Iran’s enrichment of uranium, which the West has charged is aimed towards a nuclear bomb, a charge Iran denies.
Administration officials say that they want to get Europe — and Russia and China — to ramp up the sanctions against Iran if Tehran refuses to stop its enrichment of uranium.
The Obama administration will also be asking European governments to step up to take some of the Guantanamo prisoners off of America’s hands.
“Our security is shared,” Mr. Biden told the group in Munich. “So, too, is our responsibility to defend it.”
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