Saturday, May 08, 2010

Central and Eastern Europe's Minsky Based Economic Recovery ?

Professor Arnold Kling writes,

``In a Garett Jones economy, hiring is discretionary. It is not tied automatically to output. Instead, it is a form of investment. In a Minsky economy, when the economy is in a "hedge finance" stage, businesses are reluctant to borrow and instead finance investment out of profits."

In Deutsche Bank's study on Central and Eastern Europe (CEE), they note that Eastern Europe's economic recovery has been credit less.

"Although Eastern Europe is lagging other EM regions in terms of recovery, most countries have left recession and and will record modestly positive growth rates this year. Only the worst or latest hit countries (Latvia, Lithuania, Hungary, Romania and Bulgaria) were still in recession in Q4 2009 or Q1 2010. But the recovery has been credit-less so far. Credit is still declining in most countries (see charts) and will only pick up slowly."


This means that for the CEE region, savings has served as the template of the recovery, not credit. In the Minksy model, savings leads to profit.

Hence, perhaps we are seeing a seeming Minsky model of profit -based economic recovery in the CEE region.

Nevertheless, some signs of renewed appetite for credit lending has emerged. Here is the New York Times, (bold highlights mine)

``No other region of the world suffered more grievous economic damage from the financial crisis last year than Eastern Europe, and a main cause was extensive borrowing in euros and other foreign currencies.

``When the currencies of countries like Hungary and Romania plunged last year, thousands of businesses and homeowners there found themselves stuck with some of the most extreme variable-interest-rate loans on the planet. Monthly payments soared, raising the threat of defaults and bank failures that was averted only with a joint rescue last year by the European Union and the International Monetary Fund — at a cost of €52 billion, or about $66 billion.

``So it may come as a surprise that Austrian, Italian and other West European institutions that dominate the regional banking market are once again offering Eastern Europeans the same kind of credit that nearly derailed their economies only a few months ago."

Of course, going forward, its going to be a question of how the fallout from the Greece crisis will impact this ongoing transition towards more accommodation to the credit process.

My point is, the mainstream idea that credit serves as the backbone for any recovery is just false.

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