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Small European Nations Hit Hardest by Financial Crisis

Posted October. 22, 2008 03:01,   


Ireland, long known as the “Celtic tiger” for its rapid economic growth, is the first Euro zone country to slip into recession in the wake of the bursting of the housing bubble.

The three Baltic states of Estonia, Latvia and Lithuania, once called the “tigers of the Baltic Sea,” are likely to ask for a bailout from the International Monetary Fund.

Iceland will receive a bailout of six billion dollars from the IMF and several central banks, the Financial Times said Monday. A billion dollars will come from the IMF and the remainder from central banks of northern European countries and Japan.

The bailout for Iceland is the second for a European country since the United Kingdom was rescued in 1976.

Once hailed as the most livable country in the world and ranked fifth in per capita income, Iceland has been engulfed by the financial tsunami. The value of the country’s currency krona has fallen 30 percent since September.

Despite efforts to save its deteriorating economy on its own, including nationalization of three major banks, Iceland was forced to ask for an IMF-led bailout package.

Ireland, which had recorded annual growth of seven percent since 1996, has also fallen victim to the financial crisis. GDP for the second quarter was minus 0.5 percent, the second straight quarter of negative growth. As Irish banks suffer from liquidity shortages, Dublin declared unlimited guarantees on bank deposits, the first drastic rescue of banks in the world.

The three Baltic states had recorded double-digit growth since their entry into the European Union in 2004. Growth has significantly slowed, however, and the countries are now reeling from financial turmoil.

Danske Bank of Denmark has included the three Baltic states on the list of 15 countries at high risk of national bankruptcy. This year, inflation in the Baltic states reached 10.5 to 16.1 percent, with Latvia expected to suffer negative growth.

Experts blamed their collapse on economic structures vulnerable to external shocks and policymakers who did nothing while indulging in their economies’ remarkable growth.

For Iceland, the problem was excessive foreign debt. Since banking deregulation in the mid-1990s, the Icelandic economy has increased its dependence on foreign capital. Though the country has 3.5 billion dollars in foreign reserves, its banking sector’s foreign liabilities is 100 billion dollars.

The Irish economy collapsed under the weight of the housing meltdown. Its housing market grew disproportionately to its population of 4.3 million, building 100,000 houses last year alone. The United Kingdom, whose population is 12 times larger than Ireland’s, built 180,000 houses over the same period.

The Baltic states were battered by soaring prices of raw materials and the ensuing deficit in the current account and increasing foreign debts of their banking sectors. The British think tank Capital Economics said that with three billion to seven billion dollars in foreign currency holdings, a prolonged credit crunch will likely plunge the Baltic states into a financial crisis.