For U.S. investors it is easy to have an intense focus on the U.S. economy and the U.S. stock markets; however, the U.S. economy does not function in a vacuum. U.S. investors tend to have a large portion of their investments allocated to their home country stocks, but globalization has tied the fate of all the world economies together. The events unfolding in Eastern and Central Europe need to be watched as negative outcomes will impact all economies and markets around the word.
A week and a half ago, Latvia's government collapsed. As the International Herald Tribune noted,
Latvia's center-right coalition government collapsed Friday, a victim of the country's growing economic and political turmoil and the second European government, after Iceland, to disintegrate because of the international financial crisis.
The government in Riga, faced with forecasts of a severe drop in the economy this year, was the first in Eastern Europe to succumb to turmoil caused by the crisis. Its collapse rounded out a week that saw worries about feeble investment, banks and output in Central and Eastern Europe coursing through international markets.
The problems now afflicting these countries is not much different than those impacting the more developed markets-too much debt. What is complicating matters more in these emerging markets is the way in which debt was loaned to these countries and individuals within the various countries.
Money was loaned to these countries and individuals in dollars and euros. In the early stages, borrowers benefited by the weak dollar and weak euro. Recently though, when borrowers convert their home currency to the dollar or euro it takes almost twice as much of the home currency to purchase, say, a euro because of the strength in the euro or dollar. For example, recently it has taken about 11 Ukrainian hryvnia to buy one euro, compared to about 7 just 12 months ago.
A recent report from the Wharton School at the University of Pennsylvania believes a part of the solution is:
To prevent the crisis from turning into a catastrophe, Western nations should provide at least enough help to prevent Central and Eastern European governments from defaulting on their sovereign debt, which would be like the U.S. government defaulting on Treasury bonds, according to Mark Zandi, chief economist and cofounder of Moody's Economy.com.
Ultimately, adds N. Bulent Gultekin, a Wharton finance professor, the West must recognize the facts of life. "If you allow these countries to go under, you are just going to start a chain reaction. If you're a creditor, you don't want your borrower to die."
There is no easy solution to this global credit crisis.