EU mulls action as Ukraine crumble triggers contagion fears for Europe

Europe’s institutions are scrambling for ways to prevent financial contagion from Ukraine and the rest of Eastern Europe from setting off a full-blown banking crisis in Austria, with risks of systemic contagion across the eurozone.

Joaquin Almunia, EU’s economic commissioner, said Brussels is ready to co-ordinate a pan-EU response to contain the crisis before matters get out of hand.

“I share with the Austrian authorities their concern about the situation of these economies. Everybody shares their concern about the risks involved. We are extremely concerned about the difficulties with the Ukrainian government,” he said.

West European banks have lent roughly $1.6 trillion (£1.13 trillion) to the region, led by Austrian, Swedish, Italian, Greek, Belgian, and Swiss banks. Almost $400bn must be rolled over this year in hostile markets.

Lithuania’s president Andrius Kubilius echoed the warnings on Wednesday. “We are worried about what can happen in Ukraine and Russia. The collapse of one of these markets would have a very negative impact. It would be good to see a more co-ordinated approach,” he told the Financial Times.

Ukraine’s travails appear to be snowballing out of control after the central bank said the economy contracted 20pc in January year-on-year, with a dramatic 34pc slide in industrial production. Valery Lytvytsky, the bank’s top adviser, said the collapse is the worst in recorded Ukrainian history, exceeding the darkest days after the Bolshevik revolution.

The currency has fallen 40pc since the crisis began, a crippling blow to companies with large debts in dollars or euros. Three banks have failed.

Credit default swaps measuring risk on Ukraine’s state debt rose to panic levels of 3,500 on rumours of imminent default following the refusal of the International Monetary Fund to disburse the second tranche of its $16.4bn rescue package. The IMF said the government had failed to rein in public spending as agreed.

Premier Yulia Tymoshenko insisted there was no danger of default. “I would like to tell the whole country that the state is paying all its credits,” she said.

She appeared unrepentant over the loss of her finance minister, Viktor Pynzenyk, who resigned this week saying he was no longer willing to serve as a political pawn. “Not all government officials are capable of working in difficult circumstances. The weakest ones abandon the battlefield,” she said, in comments bordering on political farce.

Neil Shearing from Capital Economics said Eastern Europe as a whole is likely to contract by 5pc to 10pc this year. “It’s pretty grim and it creates the risk of a retreat into populism,” he said.

The political risks in Ukraine are huge. The country has a large Russian minority, much of it living in oblasts near Russia’s frontier, creating an open door for the Kremlin to intervene if the crisis leads to civil disorder.

Lars Christensen from Danske Bank said ex-Soviet bloc had been a casualty of the blanket extension of guarantees to banks across Western Europe. “East Europe’s governments are not strong enough to offer such guarantees for their own banks. This has increased relative risk.” he said.

The European Bank for Reconstruction and Development said it is mulling $500m in aid to boost Ukraine’s banks, but first the country has to restore credibility.

“We see an urgent need for conducive, comprehensive actions by the Ukrainian authorities,” EBRD chief Thomas Mirow said.

By Ambrose Evans-Pritchard
Last Updated: 6:29AM GMT 19 Feb 2009

Source: The Telegraph

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