Annual Meetings 2008: Europe and Central Asia Press Briefing

                                 P R O C E E D I N G S

MR. KIRCHER:  Good afternoon, everyone.

Welcome, everybody to this briefing on the Europe and Central Asia Region, which we refer to as the “ECA Region,” in case you don’t know all the acronyms in the World Bank Group.

My name is Andrew Kircher.  I am the Communications Advisor for the ECA Region.

Just for your information, this will be translated into Russian simultaneously, so if you need to, you can put on the earphones.

We will have two very short statements.  Pradeep Mitra will have a presentation, and after that, we will have a Q and A session.  We will transcribe the session and get the transcripts out to you as soon as possible.

First let me introduce the speakers to my right.  On my far right, we have Shigeo Katsu, who is Vice President for the Europe and Central Asia Region at the World Bank; and we have Pradeep Mitra to my immediate right, who is the Chief Economist for the Europe and Central Asia Region.

Without any further ado, let me turn to Shigeo first.

MR. KATSU:  Thank you, Andy.

Obviously, we gather here at this round of Annual Meetings this year under very, very turbulent circumstances.  What we all know started as a problem in the U.S. sub-prime market has now sort of morphed into a global financial crisis, and no country is immune, and it has already also moved on from the financial to the real sector.

So, of course, our partner countries in the Europe and Central Asia Region are not immune to it.  Many of them are starting to feel it already.

We were just in a bilateral delegation meeting with one of our countries, and indeed the government indicated that while so far they have not been touched, they are already bracing themselves that next year they will feel the effects.  And I think it is absolutely right that indeed governments have to be prepared on, looking ahead, how the crisis might affect them.  And of course in that context, from our side what is important--and it was also mentioned several times by President Zoellick--is we have to make sure that the financial crisis does not turn into a human crisis.

The good news so far for the countries of our Region is that the prolonged and sustained effort to establish strong macroeconomic policies, sound fiscal foundations, and structural reforms, these efforts over the recent years have indeed helped in building a stronger base that has allowed the countries to be much more resilient today than what they were maybe ten years ago when we had the last global crisis.

But of course, any prolonged downturn will have indeed worrisome effects.  Pradeep will talk in his presentation about what to look out for, some of the transmission mechanisms.  Of course, our countries are integrated in the world economy, so the transmission can come from both the capital side but also from trade flows and investment flows.  And of course, the way that the countries are integrated, be it on one side with the European Union and on the other side in terms of economic and trade relations, more again with Russia, will very much affect the way that the economies will weather the turbulence.

In that context also, one particular element to point out is when these downturns are prolonged, the common people in many of the countries are affected, in particular those countries that are sending a lot of the citizens abroad, be it as migrant workers and otherwise, because remittances, which account in particular in many of our poorer countries for a large share of the incomes, are going to be, we fear, particularly hit.  Of course, it means that remittances, which indeed go to the poorest segments of societies, poor families, are very often the lifeline for large parts of the population, and this brings home even more the impact, what we currently see, of the triple-whammy of food, fuel, or energy if you want, and finance, so all these three vulnerabilities are coming together.

So, in short, we certainly, for the reasons outlined just above, are urging policymakers in the Eastern Europe and Central Asia Region to pay really continued attention to protect the vulnerable from the impact of the elevated food and fuel costs and now the financial turbulences, like paying particular attention to social safety net arrangements and social assistance.

We also want to encourage all policymakers to keep focused and be well-prepared, and let me in this context now turn to Pradeep to give us an overview a little bit more in detail on how we see things evolving at this point.

MR. MITRA:  Thank you.

I am going to talk about three things--number one, give you a broad picture of what is happening in our countries now at the broad, sort of macro level; I’m going to talk secondly about what are some of the transmission mechanisms that we see of a crisis that has originated in advanced economies and the way they are being transmitted to our economies; the third thing I’m going to talk about at the end is what are the policies, broadly, that can be helpful, and within that, I’m going to talk about both short-term measures to address the immediate crisis, because that is what is consuming people now, but also some of the medium- and long-term measures that we must not lose sight of in order to keep the transition countries progressing forward and integrating into the world economy.

Number one, the broad brush, and what I have here is a picture of economic growth in a number of our countries from 2004 to the second quarter of 2008, and these are year-on-year changes.  And there is only one point about this chart that you need to remember, and that is that economic growth was very high in most countries, but there is a general downward trend, so economic growth is moderating; and in most countries, that has happened smoothly with the exception of Estonia and Latvia which have experienced a hard landing.

Again broad brush, let’s look at what is happening in inflation in five subgroups of countries in our Region--the Western Balkans, the new EU member-states, the middle-income CIS, which is Belarus, Russia, Ukraine, and Kazakhstan, low-income CIS, seven countries, three low-income countries in central Asia, three South Caucuses countries, and Moldova, and Turkey.

There is a very simple point here as well, which is that inflation has been going up, and certainly in the middle-income CIS and the low-income CIS, which are the most vulnerable part of our Region, inflation is in double digits.

The third point I want to make, again at the broad brush level--everybody knows that during the good times, during the boom years, domestic credit growth was extraordinarily high.  What we have in this chart is, looking at the rates of growth in domestic credit in a number of countries, and the message is it has been extgraordi8narly high.  Look at the height of some of these lines around 2005-2006; domestic credit is on a downward trend.

So that is at the level of broad brush.  That is to say--and let me recap that--number one, growth is slowing; number two, inflation is rising, it is in double digits in the CIS; number three, domestic credit growth is moderating from very high levels.

How do the markets see our countries?  Let’s look at some market information.  What this presents is sovereign credit default swap spreads, and the higher they are, the more the market is pricing in the chance of the sovereign defaulting on its obligations.

If you look at the right of the chart, in July, August, September of ’08, there are four countries which are at the top--Ukraine, Latvia, Turkey and Kazakhstan.  So they have among the highest CD swap spreads.  And then look at how sharply they are rising.  Some of them are rising more sharply.  So they were already high around the middle of the year, and they have risen sharply.

So the message in this chart--and we are comparing it, by the way, not only with other countries but also with Latin America and emerging Asia, which are shown on the chart--so the message is that already these sovereign CD swap spreads were high for a number of our countries, and they have increased sharply.  So the market is saying there is an element of vulnerability.  I want to be clear, by the way, this refers to the sovereign, whereas in our countries as a result of the reforms that have been taking place over the last 15 to 17 years, the sovereign is generally in good fiscal shape.  The problem is not in the public sector; it’s that the private sector is the source in this case of the imbalances that we see.  But nevertheless the sovereign spread gives one a broad brush idea of how the markets see our countries.

What I am now going to talk about, having done the broad brush, is to talk about some of the channels of transmission of the global financial crisis to our countries.  What this chart does--and look at the below-the-line--we have countries with large current account deficits--you have Latvia, Bulgaria, Lithuania, and so on--that’s the blue--and on the top, above the line, we show how net capital flows are financing this deficit.  And broadly speaking, there are maroon-to-brown elements--that is foreign direct investment--and there is a buff, which is bank borrowing.

Now, of course, as you know, there are portfolio flows in bond and equity as well.  This is the next chart.  So on a net basis, those things don’t show up on the chart.

There are two points to remember about this chart.  Obviously, countries where the blue is very large are more vulnerable, because the model has been let’s finance growth and investment by going to capital markets, banks, so the larger the deficit, the more vulnerable they would be.  The second point is the quality of financing that deficit matters.  The more FDI there is, the more maroon-brown, relatively, the safer things are, but the more buff there is, the more volatile things can be.  And certainly in a financial crisis where the banks are centrally implicated, the proportion of buff--not so much the level, but the proportion of buff--to maroon should concern us.  And you can see for yourself where the buffs are more important.

So, that is one channel of transmission.  Just to confirm that another indicator of vulnerability which I show here is that on the vertical axis, the blue bars measure how much short-term debt is coming due as a ratio of reserves.  So, for example, you can see some of the countries on the left have very high ratios of short-term debt to reserves.  Usually, the rule-of-thumb, the very gross rule-of-thumb, is that is should not be more than 100 percent, and in fact if there is some cushion between the number and 100 percent, so much the better.  And you can see that there are some countries which face what we call rollover risk--can they roll over their short-term debt, do they have enough reserves to cover themselves in case there are difficulties in the debt markets.

So, what have I said about transmission so far--that through the capital markets, capital account, the transmission is toward large current account deficit, financed mainly by bank borrowing, with rollover problems being signaled by things like the amount of short-term debt to reserves; then, those countries are going to be vulnerable to a financial market crisis of the kind that we are seeing.

I want to spend a couple of minutes unbundling this bank borrowing that I have been talking about.  As you know, in a number of our countries, there are significant Western European banks which have a presence, and some of these Western European banks, as we have seen in recent weeks, are experiencing funding difficulties in their parent markets.  So there is always a possibility that there could be contagion from one country to another if the European bank in question were really to get into trouble.

Now, there is some good news, and there is some not-so-good news.  The not-so-good news first is that if you look at things like what the market says the chance of default is, if the credit default swap spreads for the major European banks that are active in our countries, you find that those are trending up.  That is not peculiar to those banks.  If you looked at banks anywhere around the world, you would see that.

The good news to some extent is that some of our major European banks that are active in Eastern Europe have a reasonable funding structure in that they rely relatively more on deposits to fund themselves, which are more stable, as opposed to going to fund themselves on the wholesale market.  It is not as safe as one would always like it to be, but there are some favorable numbers to be had which suggest that some of them could ride out the crisis without major damage.

So much for transmission through the capital account.  Let me turn to transmission through the current account.  Here--this is familiar stuff--this is saying that since the financial market crisis is now widely expected to cause a recession in Europe--a recession in the U.S. as well, but of course our countries are more exposed to Europe than the U.S.--recession in Western Europe will translate into lower trade flows, and the countries that trade most with Western Europe, which I call the EU15 here, are going to be more affected through that channel.

The other point--and Mr. Katsu mentioned this--is that a lot of our countries have a huge reliance on workers’ remittances.  Indeed, in the Region as a whole, workers’ remittances are second only to foreign direct investment as a source of finance, and in some of the lower-income and lower-middle-income countries, they are the largest source of external finance.  If you look, for example, at how high some of these bars are as a percentage of GDP, if follows automatically.  If you look at most of the economic growth projections for Western Europe on the one hand, and you look at the growth projections for the countries that receive migrant workers in the CIS--Russia, Kazakhstan, Ukraine--all of them are projected to slow down, so there is going to be a hit on workers’ remittances as well.

So there are two transmission channels.  One is through the capital account we talked about, the quality of financing, bank borrowing, monitoring the health of banks, and the current account, which is trade flows and remittances, both of which can be expected to slow down on any reasonable assumption.

What I want to do in the final part of the presentation is to talk about some of the policy issues that are raised, and I want to start with a big caveat.  The financial crisis is unfolding.  It is still in its early stages.  It is beginning to hit our countries.  In fact, the news from Central Europe today is quite discouraging in terms of the hits that some of the countries have taken, but it is still early days, and therefore, some of the policy advice that we find in these slides is based on a preliminary reading of what is going on, and one thing we can be sure of in this financial crisis, and you have seen it in the last few weeks, is that things change very rapidly, and if things change very rapidly, the policy advice needs to keep up with the changing reality.

So let’s move on finally to the policy advice.  The first point is just to confirm something I said--financial markets have tightened.  Our countries are for the most part slowing down, or are expected to slow down, but the adjustment has been quite smooth.  There hasn’t been a disorderly adjustment.  Estonia and Latvia have experienced a hard landing, but it hasn’t really been disorderly.  Things have come down sharply, but there is not a chaotic situation in the market.  However, while we all hope that there is not a disorderly adjustment in any of our countries, there is some reason to be optimistic because of the huge amount of structured reform that has happened since 1989 and 1991.  While there is reason to be optimistic, it would be imprudent for policymakers to plan on the basis thoroughly of optimism; so that we need to be prepared in the event of a disorderly adjustment.

What does that actually mean?  If the financial markets are transmitting a disorderly adjustment, there are some things the authorities need to think about.  Number one--and you see this from the U.S., the UK, and the coordinated European response--is to stand ready to provide liquidity support, and that has to address problems of insufficient capital in the banks.  If you remember, on Wednesday--that is only two days ago--the UK announced a very comprehensive program for the Treasury to take equity positions in banks to beef up their capital.  In the U.S., there is increasingly thinking that a lot of the package that was passed, the $700 billion package, might actually go for the authorities to take equity positions in undercapitalized banks.  So, capitalizing banks is going to be an important issue in all countries.  I am now talking about our countries.  The first thing, capital.  The second thing--their troubled assets on balance sheets.  As far as we know, in our countries, there aren’t the same troubled assets that there are in U.S. and some European banks.  That is, they have not been exposed to derivative securities based on the mortgage market.  And sometimes people ask why not.  The reason is they have had very good investment opportunities in the countries, because the countries are reforming, they are growing, so there has not been any need to go into that area of the market.

So this may be somewhat less relevant, that there may be some banks where we might find that there are balance sheet problems, in which case that needs to be tackled.  And the third part--the first was, remember, capital; second, troubled assets--third is that banks are facing funding difficulties in the inter-bank market.  We have seen this in Russia, we are seeing it in Rumania, we are seeing it in various countries.  So the authorities have to be prepared to pump liquidity so that the funding difficulties are--and you know that a number of countries have already taken steps.

Now, there is one additional issue.  I talked about parent banks, cross-border banks, which may be based in Western Europe but have a significant presence in our countries.  So, when those banks run into difficulties, it is absolutely essential that there be cooperation between the supervisory authorities in the home country and the supervisory authorities in the host country.  And indeed, there are a number of initiatives which my colleagues have taken to broker that kind of conversation between host and home supervisory authorities.

So that is the short term.  This is something which we already mentioned, that a slowdown, the recession as a result of the financial crisis, will affect trade flows and remittance flows and therefore can affect our countries adversely.

Let me move on to some of the longer-term policy issues.  One of the dangers is to do things in the short term that one would live to regret in the medium term, and what this slide says is that deepening structural reforms and fiscal policy is very important.  There are a number of countries in our Region where, during the good times, fiscal policy has been very lax.  So it is necessary to have a more disciplined fiscal policy.  As I said in an earlier slide, in the CIS countries, double-digit inflation is a problem, so fiscal policy needs to be appropriately stanced in order to deal with it.

Intensifying banking supervision--nobody will argue with that today--and improving the investment climate in things like competition, infrastructure and governance so that countries can exact non-debt-creating flows, which are less volatile.

There is a problem that I need to tell you about, and the problem is that we said in the earlier bullet that it is necessary to pump liquidity and do everything possible to restore confidence in the banking system when that has broken down--but will that feed inflation in the future?  And that’s why that bullet says “follow future developments in monetary conditions as volatility declines.”  That is important that the central banks have instruments to withdraw the liquidity when confidence in financial markets has returned.

So there is a balancing act between the short term and the long term, and we must not forget that these are difficult tradeoffs.  We also must not forget that advanced countries are struggling with this problem, and since these are early days, the nature of the advice is such that it is bound to change in certain respects.  But these are things which are in the category of principles.

Let me end with a point that Shigeo Katsu reminded us of.  We are all consumed by the global financial crisis today, but there is another crisis arising from higher food and fuel prices which are not as high as they were some months ago, but they are still high, and they are affecting the poorest households.  So we remind our audience that a number of our countries have reasonably good targeted social safety nets, and it is necessary to top up those safety nets in order to meet the impact of the food and fuel price increases.  Ah, but then you must say, didn’t you tell us that fiscal policy has to be responsible rather than lax?  Yes, I did.  So, what this says in the end is that we need to have reallocation of public expenditures away from programs which are not particularly targeted toward the worst-affected and substitute for those, top up the ones that are well-targeted, so that does not relax the fiscal stance.

Let me end there.

MR. KIRCHER:  Thank you very much, Pradeep.

Let’s turn to you now in the audience for some questions.  I think we have two microphones that we’re going to be passing around, and when you ask your question, please identify yourself and your news organization.

This gentleman, here in the second row.

QUESTION:  Umit Engen [ph.] of the Turkish NTV Television.

My question is primarily for Mr. Katsu.  How would you expect Turkey to be affected by this financial crisis, which is still in its early phases, and what would be your suggestions?

Thanks.

MR. KATSU:  Turkey is a very interesting case, because it is the one country that already went through a very serious financial crisis in 2001, and it has over the last seven years worked very hard to restructure and modernize its economy, and as a result of those efforts, I expect Turkey to come through the current crisis in much, much better shape.

Having said that, Turkey is not immune from the impact of the global crisis, but just looking, I think, at some of the movements this week, whereas I think in the U.S., in Japan and in Europe, most stock market indices dropped by 25 percent or so cumulatively, in Turkey, I think they have kept at the level of 17, 18 percent.

What we have seen is that every day, Turkey, hearing the bad news from the Asian and other markets that opened before, starts to drop and, during the day, starts to climb back.  We don’t see at this point also a distress in terms of the inter-bank liquidity and those telltale signs, so right now, I think Turkey is weathering pretty well.

MR.  KIRCHER:  Thanks, Shigeo.

The gentlemen right here in the second row.

QUESTION:  Thank you very much.

I am John Gizzey [ph.], with Human Events, the News Weekly, here in Washington.

My question is for Mr. Mitra, but I’d also like to see Mr. Katsu weigh in on it.  You spoke, sir, about doing things in the short run that we might regret in the long term, and at the same time that you are calling for more discipline in the private sector and in banks, many governments now talk about getting over the current slump through stimulus packages.  Currently, Prime Minister Aso [ph.], upon taking office in Japan, talked about trying to get a stimulus package through the Diet; the German Finance Minister has discussed it.  Is that not something that would fall into the category of something a country’s economy would regret in the long run?

MR. MITRA:  A very good question.  When you have a meltdown in financial markets, when you have parts of your credit market shutting down, as for example in Russia, the most important thing is to get confidence restarted.  And it is for that reason that it is necessary to pump liquidity, to ease funding difficulties, necessary if a bank is undercapitalized to take the appropriate measures.  Because the luxury of devising the optimal long-run policy is simply not available at the time, but the principles we are talking about are that, okay, let us suppose the state takes an equity position in commercial banks in order to help recapitalize them.  Why might one not live to regret that?  The reason is that when the confidence returns to the credit market, and the economy is back to normal--and that is of paramount importance today--the value of those stakes are going to go up, and at that point, the authorities can sell that stake in the market and actually make a profit, which will accrue to the taxpayer.  That’s an example of where--there are tensions; we do not deny that--but there are certain principles which one can follow so that the appropriate phasing of the policy works out.

Similarly with putting liquidity in the inter-bank market.  As I said, it is being done by a large number of countries, of course, in the U.S. and Western Europe, but the idea is they have the instruments, so that when normalcy returns, they will withdraw market-backed liquidity, because if they didn’t, it would fuel inflation.  But they do have the instruments through open market operations to do that.

MR. KIRCHER:  Mr.  Katsu?

MR. KATSU:  Just to add, the purpose of injecting liquidity or recapitalizing is of course that the financial system can function again and pump financial resources into the real sector.  Right now, what we are seeing with the seizing up is that the funding simply does not go to what you would call here Main Street, and with all the attendant risks.

MR. KIRCHER:  Thanks, Shigeo.

I think I saw some hands go up in the back there. Yes, the gentleman right there.

QUESTION:  Sergio Sakov [ph.], with Tass News Agency from Russia.

My question is to Mr.  Mitra.  You mentioned that some countries of the Region are not experiencing a soft landing, and the situation is worsening.  Do you expect any sovereign default on some of the countries of the Region?  You mentioned also that remittances are slowing down and the growth is slowing down and trade is slowing down.  And in this regard, the second part of the question maybe is to Mr. Katsu.  We heard recently about the negotiation of Icelandia in Iceland and Russia to provide a stabilization loan of 4 billion euros to Iceland.  Do you think Russia could play some kind of stabilization role in the Region to provide some loans to stabilize and to help the poorest countries in the Region?

Thank you.

MR. KIRCHER:  Thanks.

Pradeep, do you want to go first?

MR. MITRA:  Okay.  We do not expect a sovereign default in any country, and let me tell you with reference to Estonia and Latvia, they have experienced a hard landing, but it has been orderly.  And you did mention Iceland.  There is absolutely no comparison between the economic and banking health of the Baltics with that country, so we do not see any comparison between the countries that I’m talking about and countries which are in more serious difficulty.

Low-income countries, you asked about, might they have a problem.  Yes, they would have a problem inasmuch as remittances would fall, and that is, as we have said in the presentation, a problem, but there are some offsetting things.  The price of oil is falling quite rapidly as well.  These countries are for the most part oil importers.  So there is no reason to expect a sovereign default, number one.

Number two, I think we need to embed this particular discussion in a longer-term context which is to say most of our countries since the beginning of the transition have been reforming, albeit at different speeds, but all of them are reforming, which has left them with stronger economies.

Do you want to take the question on Russia and Iceland?

MR. KATSU:  On the question on the 4 billion and similar maybe initiatives for other countries, of course, we are talking about a global crisis, so to the extent that support to any country in the global context may ease overall conditions and lead to an orderly workout or facilitate orderly workout, contributions by any country that can afford to would certainly be welcome.

MR. KIRCHER:  Thanks.

Do we have any other questions?  You, sir, in the front row--if you could just wait for the microphone to come around.

QUESTION:  Hi.  My name is Andrew Edwards from the Dow Jones News Wire.

You said the crisis was in early days.  I’m wondering what would be the signs that we are entering the middle of it or maybe coming to the end of the crisis.

MR. MITRA:  The crisis as we now know it originated in the U.S., and the first signs became visible in the summer of 2007.  Since then, there was a feeling that this could not happen in Western Europe, and events have proven otherwise--but it is the second time for those events to come to light.  There could be a presumption that this happens in the U.S., it happens in Western Europe, but this kind of thing does not happen in Eastern Europe.  And for the most part, if you look at the data, there has not been the same volatility except in the last couple of weeks.  That is why I said that as far as the impact of the crisis on our countries is concerned, it is early days; it will play out for a while.

Secondly, the evidence suggests that in the advanced countries, financial market distress is accompanied by much longer and deeper recessions in the advanced countries than if the turbulence originated elsewhere.

So the recession will likely be more protracted, and inasmuch as it has a knock-on effect through trade and remittances on our countries, they can be expected to have a slowdown which will last a while.

I think what one would see in the first instance, in answer to your question of how would you recognize a recovery if you saw one--I take that to be the question--the first thing is restoration of the health of the financial system--so when banks do not have funding problems in the inter-bank market, when their stocks trade at levels which are historically normal, that’s what one would expect for a crisis that has come from the financial markets.  And then, once normal channels are restored, one would expect the real economy, inasmuch as it is dependent on credit markets, to recover.

But I think that since it is early days in our countries, the recovery is something that we’ll have to wait for.

MR. KIRCHER:  Thanks, Pradeep.

Let’s see if there are one or two more questions in the audience.

Yes, you in the front row.

QUESTION:  Paul Eggert, from Reuters in Washington.

Mr. Mitra, you mentioned that falling oil costs will ameliorate some of the effects for most of the countries you are talking about, but your countries also included, of course, Russia and Kazakhstan and Turkmenistan, who are major energy exporters.  How do those prices weigh on those economies and their potential recovery?

MR. MITRA:  I think that’s a very good question.  We have, in addition to Russia, Kazakhstan and Turkmenistan, Azerbaijan as well, and these are major oil exporters.  What we have seen in, for example, the Russian markets in the last few days or couple of weeks is in part driven by the declining price oil.  It is related in part to the transmission of the financial crisis, but it is also related to the trajectory of the price of oil.

Now, obviously, it is very important for Russia, as indeed it is for the other oil-exporting countries.  The situation is this.  When the Russian authorities formulate a budget, they make assumptions about what the reference price for oil is going to leave them comfortably off, and the price that they have been using is of the order of $70 a barrel, and we are still so me way above that, and the protections that the Bank, our colleagues in projections are making, are more in the nature of $80 a barrel.

So I think that with structural reforms and so on, once they take hold, yes, it will be difficult for the oil-exporting countries, but this is not something which is unprecedented, because after all, the rapid rise in the price of oil really started from about 2003-2004, and before that, this particular source of bounty was not available.

MR. KIRCHER:  We probably have time for one more in case there is a last one--you, sir, in the second row.

QUESTION:  Croatian News Agency. 

A question for Mr. Katsu.  What effect will this global financial crisis have on countries with large external imbalances, like Croatia, with a huge external debt that is 90 percent of GDP, and a huge current account deficit of around 10 percent of GDP?  Regarding the refinancing of the external debt, what measure would you suggest to the Minister of Finance?

MR. KATSU:  I’ll just consult the--you saw on the screen earlier the table.  Maybe we can go to Table Number 6--oh, it is turned off. 

MR. KIRCHER:  We can get you the handout so you can see the chart.

MR. KATSU:  Croatia is a country, as you said, which has double-digit current account deficits.  If you look at how it is financed, Pradeep mentioned earlier the two colors, the maroon side and the buff-colored side, and a large extent, maybe 70 percent or three-quarters of the current account deficit has been covered by foreign investments, the rest through bank--through borrowing.  So I would expect that some impact might come in terms of higher, more difficult or higher cost for rollovers for the borrowing part, as well as a slowdown in the foreign investment side.

On the other hand, if you have a slowdown in foreign investment, you also probably have a slowdown in imports, and there is a sort of stabilizing part there as well.  But overall, I think the transmission will come simply from the fact that Croatia is very much integrated into the European markets.  The external anchor that currently exists for Croatia is that it is in negotiations with the European Union on accession, and that means that it has to shape its macroeconomic policies in quite a disciplined manner which will probably go a long way in stabilizing and dealing with the impact of this crisis.

MR. KIRCHER:  Thanks, Shigeo.

Thank you, everybody, for coming.  We have a press release on the way out if you want to grab that.  We also have a Regional Brief on the ECA Region that gives a lot of basic statistics and information about the Region.

So, thanks, everybody, for coming, and we’ll get the transcript out to the Press Room as soon as we can.