[SOUND]. In the previous part I spoke about impact of global financial crisis on emerging market economies. And now I would like to put emphasis on the Eastern Europe, Central Eastern Europe and former Soviet Union, which these two regions experienced the biggest shocks coming from the global crisis. At it was particularly shocking for the general public and the policy makers and in these countries. Because before 2008 both regions experienced global economic boom, including commodity boom, fueled by expansive US monetary policy and lax financial regulation which were behind the fundamental results of the global crisis, but it was not well understood in emerging markets, including those two regions. The most of Central and Eastern Europe, and former Soviet Union experienced quite strong post-transition growth recovery at that time and, in addition, Central and Eastern Europe also benefited from accession to the European Union. And here we see how real GDP perform. We see that until 2006, 2007 several countries could work quite impressive pace, for example, Armenia, for example, Estonia, Latvia, Georgia, Slovakia. Russia. Romania. Ukraine. But then came shock, and some of these countries started experience problems solidly few months or even years before then Lehman Brothers' bankruptcy, because already some strains on financial markets were in place. And some of them experienced also domestic shocks like banking crisis in Kazakhstan. In here the green color indicates cases where output decline during crises was particularly dramatic of ten percent points or more. And these are cases of Armenia, these are cases of Belarus, of Bosnia and Herzegovina, of Estonia, Latvia, Lithuania, Moldova, Montenegro, Romania, Russia, Slovakia, Slovenia, and Ukraine. Only few countries manage to avoid decline or deeper decline. Countries like Albania, like Azerbaijan, like Kosovo, Poland. But all others it's been quite a dramatic shocks and what were particular region's vulnerabilities, apart from those which we analyze in respect to all emerging markets? Before it's a global financial crisis; Central and Eastern Europe, benefited from exceptionally low risk premia, in both government and private borrowing, and there were several explanations of this. We are not sure until now what exact factors played a role. Probably it was perception of new situation after joining the EU, or perspective of joining the EU, for example, in case of western Balkan countries. There were also expectation of joining Eurozone. Some of these expectation materialize like in case, Slovenia, Slovakia. But some others had to be an advisor in case of Poland or Hungary. There was rapid capital inflows and credit boom as a result of this lower premia and we can say that countries of central, eastern Europe became victims of its own success. But it created rather limited appetite for prudent policies and further reforms, so reforms in this region stopped after joining the EU. And here we see how capital flows, private capital flows rapidly grew before crisis. How the decline in 2009, and how current account adjusted to this rapid changes in capital flows. And this was also part of the story about crisis. And they were very strongly dependent on trade with EU. By the way, this concerns not only Central and Eastern Europe, but also most of the countries of former Soviet Union. And then long problems in the Eurozone, stagnation and recession also impacted negatively on so-called emerging Europe, eastern part of the continent. But apart from regional vulnerabilities, also individual countries had their own problems. Most of the countries of former Soviet Union depended on commodity prices, most were oil prices, but also metal prices, some honor agriculture commodities. Some countries like Belarus, where it is strongly dependent on privilege trade relations with their partners. In case of Belorussia, or, in case of Belarus it's in part of privilege import of oil from Russia and then they're exporting into Europe. Then there were some of them experienced strong currency mismatches and maturity mismatches, especially in respect to mortgage lending, where banks borrowed on short term, other global markets, and then lent and lent money on long term to domestic clients. A large part of this lending was in foreign currencies because it looked cheaper borrowers didn't realize potential, foreign potential exchange rate risk. In some countries, this mortgage boom was additionally strengthened by tax incentives, this was the case of Baltic countries and this was wrong, but unfortunately, this makes a situation even worse. Several countries, especially countries of former Soviet Union had problems with financial supervision. This was problem of Russia, for example, Ukraine or Kazakhstan, which led to deep problems in the financial sectors. Then fiscal policing was not so much prudent, as it could look in first glance. And especially, if fiscal balances are adjusted to psyche, in business psyche. In several countries didn't progress with economic reforms, especially countries of former Soviet Union. But also new member states of the union, they largely stop economic reforms when they join EU. And here we can see some of vulnerabilities, the economic vulnerabilities which we spoke about. Here's a current account balance and we see that some countries run extremely high current account deficit they were determined by large capital inflows and then had to adjust rapidly. This is the case of Bulgaria, this is the case of Estonia which went from deficit of almost 16% of GDP to current account surplus. This was even bigger adjustment case of Latvia, more than 20% of GDP current account deficit in 2006/2007. And the substantial surplus in 2009, was case of Lithuania. But also some other countries had very large current account deficit, and they became the problem in the time where financial markets dry up. Here we see fiscal deficit or surplus as fiscal balances. And also, several countries run continuously high deficit in relatively good time, in time of boom. This was the case of Albania, this was the case of Hungary, this was also the case of Poland, Romania, to some extent. Other countries look better. But when we take a look into structural balances, unfortunately, they are not of relate for all countries in IMF statistics. But we see that picture look not so good. Of course, there were countries which their own surplus even also structurally adjusted bases, like Bulgaria. But in other countries, the picture look not so good. And this, for example, concerned Croatia. This concerned Hungary, which I already mentioned. This concerned Poland, Slovakia, and then during the crisis of Slovenia, Turkey, and Ukraine. And as a result, debt to GDP ratio, which in most countries, decreased before the crisis because of the vast GDP growth. Then started to rise again, during the crisis. In some cases, to the level which may, we may doubt will persist in the longer term, I mean especially Hungary. And there were also numerous problems in the private sector. Here we see the changing ratio of private sector credit to GDP. And this preceding the financial crisis from 2003 to 2008. And we see that in some countries the level of credit to both households and firms increased dramatically in not the total stock but increases during the six years. And we see that there were enormous increases of the credit exposure to both firms and households in Montenegro, in Estonia, in Ukraine, in Latvia, in Bulgaria, in Lithuania, in Slovenia, Hungary, Macedonia. Countries which were less affected, there were Slovakia, Moldova, Belarus, but because of the financial impression in financial sector of this country, Turkey, Serbia, Croatia, Russia, Czech Republic, and Poland were less affected. Other countries real experience subsequently we can tell credit boom. And here we see the effect of this credit boom for real estate sector and we see that some countries experienced dramatic increases in real estate prices, especially Russia, Bulgaria, Lithuania, Latvia, Estonia, Poland. It's true that some of these countries started from very low level of real estate prices, and then they adjusted in the situation when in post-transition environment. But in many cases, it proved beyond limit, especially in Baltic countries, which experienced huge problems in the financial sectors. And this led to necessity to adopt corrective programs and stabilization programs by number of countries with participation of IMF and few cases, also with participation of European Union. And there were several standby arrangements in 2008, 2009, 2010, Hungary, Ukraine, Serbia, Latvia, Belarus, Romania, Moldova, Bosnia, Herzegovina, and outside the Eastern Europe, Iceland. Advanced economy Europe also experienced huge financial crisis in 2008, for the same reasons, over-lending and over-engagement in real estate lending. Then some countries also secured themselves by precautionary lending, like Flexible Credit Line of Poland, or Precautionary credit Line of Macedonia, so they didn't experience open crisis but still they preferred to secure themselves. And finally we must mention about so-called Vienna Initiative undertaken by IMF, European Bank of Reconstruction Development, World Bank, European Commission and private banks from several countries, European countries, which was aim this Vienna Initiative at arresting regional contingent through banking channel. It also international financial organizations who wanted to have so called private sector involvement, to avoid using their resources for full bail out of private creditors. The kinds of lessons which they draw, drew from emerging-market crisis 1980s and 1990s. And this worked quite well, that initiative. But it work quite well because of the particular ownership structure of Central Eastern European banks. What were, what I have mean? I mean, the ownership structure a high share of assists owned by foreign banks subsided in the region which dominate the financial sectors of Slovakia, Estonia, Albania, Lithuania, Croatia, Romania, Czech Republic, Hungary, Bulgaria, Poland, Serbia et cetera. And because the dominance of subsidiaries of Western Europe and Global banks, it was easier to coordinate action to keep financial sectors of Central Eastern Europe countries going, and avoid cross-country contagion in the banking sphere. This is all what we wanted to say about consequences for global financial crisis. In the next part we'll move to analysis of how the global economy with substantial share of emerging markets works these days. [MUSIC]
