On February 26th I posted an article on this site, suggesting that despite the hyperbole, the problems with the banking system in Eastern Europe were not as bad as appeared. Still, it looked like I was wrong as Eastern Europe topped the charts with bad banking.
Actually, I was accurate. My hypothesis does seem to have some validity. The culprit in chief turns out to have been none other than the IMF. The IMF admitted today that it grossly exaggerated estimates of the external debt levels of crisis-hit eastern European states. The estimates were sometimes double the actual amounts. The numbers are a ration of external debt refinancing needs to foreign exchange reserves. The ratio for the Czech Republic was cut from 236 per cent to 89 per cent and Estonia’s was reduced to 132 per cent from 210 per cent. It is understood the figure for Ukraine is also being cut to 116 per cent from 208 per cent and even Lithuania’s dreadful ration of 425 per cent will be recalculated. Although still high compared to other parts of the world, the new numbers make the situation in Eastern Europe more tenable. For example, by comparison, the highest ratio in Asia is Korea with 93%.
The reason that the IMF gave was “data entry error”, which brings up a major point about financial markets, information. The main flaw in the efficient market hypothesis is that it assumes perfect information. Even in the best of circumstances by the most well meaning and reputable source, information is imperfect. Perhaps the IMF can eventually correct its mistakes, but when there is a large economic incentive to hide or give false information, the real truth can be hidden for years.
So before you look at any chart, economic projection or financial analysis - especially from an emerging market - ask where information came from and the probability that it bears any relationship to the truth.
